OAK  ST.  HDSF 


ANSWER  OF 


State  Industrial  Commission 


TO 


THE  REPORT 


OP 


JEREMIAH  F.  CONNOR 

Moreland  Act  Commissioner 


ON 


STATE  INSURANCE  FUND 


ALBANY 

J.  B.  LYON  COMPANY,  PRINTERS 
1919 


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University  of  Illinois  Urbana-Champaign  Alternates 


https://archive.org/details/answerofstateindOOnewy 


"5  "S  I.  cL5~ 

A/ <3-89  a. 


ANSWER  TO  REPORT  OF  JEREMIAH  F.  CONNOR 


July  9,  1919. 

Hon.  Alfred  E.  Smith,  Governor  of  the  State  of  New  York , 
Albany ,  N.  Y.: 

Dear  Sin. —  Under  date  of  June  7th  the  State  Industrial  Com¬ 
mission  received  a  communication  from  you  transmitting  a  copy 
of  a  report  on  the  State  Insurance  Fund  by  Jeremiah  F.  Con¬ 
nor,  Esq.,  commissioner  appointed  under  the  provisions  of  the 
Moreland  Act  to  investigate  the  management  and  affairs  of  the 
State  Industrial  Commission.  After  careful  consideration  by 
the  Industrial  Commission  of  the  various  criticisms  and  sug¬ 
gestions  contained  in  the  report  of  your  Commissioner  the  In¬ 
dustrial  Commission  instituted  an  investigation,  and  in  conjunc¬ 
tion  therewith  adopted  a  resolution  referring  the  report  to  the 
manager  of  the  State  Insurance  Fund  with  instructions  to  submit 
to  the  Commission  as  speedily  as  possible  a  statement  regarding 
the  various  matters  referred  to  therein. 

On  July  2d  the  manager  of  the  State  Insurance  Fund  sub¬ 
mitted  to  the  Industrial  Commission  a  comprehensive  statement 
in  which  he  quotes  and  makes  answer  to  every  charge,  statement, 
and  recommendation  contained  in  the  report  of  the  commissioner 
appointed  under  the  Moreland  Act.  This  answer  of  the  manager 
of  the  State  Insurance  Fund  is  attached  hereto  as  a  part  of  the 
report  of  the  State  Industrial  Commission  of  its  administration 
of  the  affairs  of  the  State  Insurance  Fund,  and  we  respectfully 
commend  to  your  consideration  his  categorical  answers  to  and 
explanations  of  all  matters  referred  to  in  the  report  of  the  More¬ 
land  Act  Commissioner. 

In  preparing  its  report  the  Industrial  Commission  assumes  that 
you,  as  Governor  of  the  State  of  Mew  York,  are  vitally  interested 
in  ascertaining  whether  or  not  the  State  Insurance  Fund  is 
efficiently  and  honestly  administered;  whether  or  not  the  fund  is 
solvent  beyond  all  question  of  doubt  and  whether  or  not  injured 
workmen  or  the  dependents  of  workmen  who  have  been  killed  are 


4 


State  Insurance  Fund 


receiving  and  are  certain  of  continuing  to  receive  the  fuii  amount 
of  compensation  and  benefits  they  are  entitled  to  under  the  law; 
whether  or  not  employers  are  paying  higher  premiums  for  insur¬ 
ance  in  the  State  fund  than  are  required  to  meet  incurred  losses, 
to  set  up  adequate  reserves,  and  to  pay  expenses  of  administration ; 
whether  or  not  the  system  of  grouping  is  lawful,  and  whether  or 
not  the  methods  of  crediting  and  distributing  dividends,  when 
earned,  are  legal  and  sound  as  matters  of  efficient  administration. 

In  order  that  the  present  status  of  the  State  Insurance  Fund 
may  be  fully  and  accurately  understood  it  is  necessary  to  review, 
briefly,  the  history  of  the  establishment  and  existence  of  the 
fund,  its  growth,  its  resources,  and  the  embarrassments  under 
which  it  has  labored  from  its  inception. 

The  present  Workmen’s  Compensation  Law,  which  provides  for 
the  establishment  of  an  insurance  fund,  was  first  enacted  at  the 
extraordinary  session  of  the  Legislature  in  December,  1913. 
Owing  to  some  question  as  to  the  legality  of  this  action  the  law 
was  re-enacted  at  the  regular  session  in  January,  1914,  and 
although  originally  intended  to  become  effective  on  January  1, 
1914,  so  far  as  the  creation  of  a  compensation  commission  was 
concerned,  was  not  approved  by  the  Governor  until  March  16, 
1914.  The  members  of  the  State  Workmen’s  Compensation  Com¬ 
mission  were  appointed  by  the  Governor  on  March  20th  and 
qualified  on  the  24th  day  of  that  month.  The  first  meeting  of 
the  Commission  was  held  on  the  31st  of  March.  At  this  time  and 
for  some  time  subsequent  thereto  the  Workmen’s  Compensation 
Commission  had  no  employees,  no  offices,  and  no  organization,  and 
it  was  not  until  the  8th  day  of  May,  1914,  that  a  man  satisfactory 
to  the  Commission  was  found  to  fill  the  position  of  manager  of 
the  State  Insurance  Fund. 

Our  purpose  in  reviewing  these  events  is  to  emphasize  the  fact 
that  while  the  provisions  of  the  law  requiring  the  payment  of 
compensation  and  death  benefits  and  compelling  employers  to 
carry  workmen’s  compensation  insurance  became  effective  July  1, 
1914,  the  Workmen’s  Compensation  Commission  was  unable  to 
set  in  motion  the  machinery  which  would  permit  it  to  sell  work¬ 
men’s  compensation  insurance  until  May  (less  than  two  months 
prior  to  the  date  upon  which  the  compulsory  features  of  the  law 
went  into  effect),  whereas  private  insurance  companies  had  the 


Answer  to  Report  of  Jeremiah  F.  Connor 


5 


opportunity  of  soliciting  and  selling  compensation  insurance  from 
the  day  the  law  was  first  enacted.  The  result  was  that  the  whole 
field  had  been  canvassed  and  large  volumes  of  business  secured 
by  private  companies  prior  to  the  date  upon  which  the  members 
of  the  Workmen’s  Compensation  Commission  were  appointed  and 
long  prior  to  the  date  upon  which  it  was  possible  for  the  Com¬ 
mission,  when  appointed,  to  create  an  organization  to  manage 
and  operate  the  State  Insurance  Fund. 

Despite  this  manifest  handicap  in  securing  business,  the  State 
Fund  has  shown  in  each  year  a  substantial  increase  in  net  pre¬ 
miums  written,  as  will  be  seen  by  the  following  table: 


Net 

Year  ending  Dec.  31  Premiums  Written 

1914  (six  months’  business  only) .  $689,764  94 

1915  .  1,293,613  15 

1916  .  1,892,561  27 

1917  .  2,694,851  17 

1918  .  3,332,841  88 


Total  . : .  $9,903,632  41 


As  indicated  above,  during  the  entire  period  from  July  1,  1914, 
to  December  31,  1918,  the  aggregate  net  premiums  written  by 
the  State  Fund  were  $9,903,632.41.  During  the  same  period 
dividends  to  policyholders  were  earned  and  credited  in  the  sum 
of  $968,003.47,  and  there  was  reserved  for  dividends  $235,558.19, 
making  a  total  of  dividends  declared,  credited,  and  reserved  of 
$1,203,561.66.  In  addition  thereto  the  State  Fund  has  accumu¬ 
lated  a  catastrophe  surplus  of  more  than  one-half  a  million  dollars. 

From  the  foregoing,  and  as  attested  in  the  report  of  the  com¬ 
missioner  appointed  under  the  Moreland  Act,  it  will  be  seen  that 
the  State  Fund  is  in  an  absolutely  sound  financial  condition. 

The  members  of  the  Workmen’s  Compensation  Commission 
and  of  its  successor,  the  State  Industrial  Commission,  have  had 
an  especially  keen  appreciation  of  the  responsibility  resting  upon 
them  with  respect  to  the  affairs  of  the  State  Insurance  Fund. 
When  the  fund  was  established  it  had  no  capital  or  assets;  the 
State  did  not  provide  any  moneys  which  could  be  utilized  for  the 
payment  of  compensation  claims;  the  only  subsidy  granted  by 
the  State  was  an  obligation  to  pay  for  the  first  two  and  one-half 
years  of  the  fund’s  existence  the  salary  of  the  force  and  the 
expenses  necessary  to  administer  its  affairs  —  and  even  this  sub- 


6 


State  Insurance  Fund 


sidy  was  withdrawn  at  the  end  of  two  years.  The  members  of 
both  of  these  commissions  felt,  and  the  Industrial  Commission 
now  feels,  that  the  security  of  injured  workmen  and  of  the  depend¬ 
ents  of  workmen  who  are  killed  is  a  matter  of  primary  and  funda¬ 
mental  importance.  The  obligation  to  protect  and  safeguard  the 
interests  of  the  victims  of  industrial  accidents  can  be  discharged 
only  by  setting  up  reserves  of  unquestionable  adequacy.  This 
the  manager  of  the  State  Insurance  Fund  has  done,  with  the  full 
approval  and  authority  of  the  State  Industrial  Commission. 

As  is  indicated  by  the  attached  report  of  the  manager  of  the 
fund,  the  years  1916  and  1917  were  years  in  which  all  insurance 
carriers  had  adverse  experiences.  As  a  matter  of  fact,  many 
insurance  carriers,  and  perhaps  all  stock  companies  writing  com¬ 
pensation  insurance,  lost  money.  The  State  Fund  suffered  with 
other  insurance  companies.  The  year  1918  was  a  period  of 
unparalleled  industrial  and  commercial  activity;  wages  and  pay¬ 
rolls  rose  to  unprecedented  heights;  industrial  accidents,  we  are 
proud  to  report,  decreased  in  number  and  severity;  the  result  was 
that  all  insurance  companies,  including  the  State  Fund,  earned 
large  profits;  dividends  to  policyholders  in  the  general  groups  of 
the  State  Fund  - —  which  had  been  suspended  in  1916  and  1917  — 
were  resumed,  but,  as  shown  by  the  report  of  the  manager  of  the 
fund,  the  dividend  declarations  which  were  made  in  the  beginning 
of  1919  for  the  policy  period  ending  December  31,  1918,  were 
not  as  large  as  the  Commission  would  have  been  justified  in 
declaring  could  it  have  foreseen  the  return  to  normal  industrial 
conditions  so  speedily  following  the  termination  of  the  war. 

We  submit  that  no  man  or  set  of  men  charged  with  the  respon¬ 
sibility  resting  upon  the  State  Industrial  Commission  could  have 
justified  their  action  had  they,  during  the  uncertain  period  follow¬ 
ing  the  signing  of  the  armistice  and  preceding  the  signing  of  the 
treaty  of  peace,  disbursed  in  the  form  of  dividends  all  the  surplus 
earned  under  the  extraordinary  industrial  conditions  which 
obtained  during  the  year  1918.  However,  now  that  the  treaty 
of  peace  has  been  signed  and  now  that  normal  industrial  and  com¬ 
mercial  conditions  seem  assured,  the  Industrial  Commission  feels 
justified  in  distributing  in  the  form  of  dividends  a  larger  part 
of  surplus  earnings  of  the  various  groups  than  was  distributed 
by  its  direction  in  the  early  part  of  this  year  for  the  policy  period 


Answer  to  Report  of  Jeremiah  F.  Connor 


ending  December  S'lst  of  last  year;  and  steps  to  this  enj  havet 
been  taken. 

As  the  question  of  first  importance  is  the  solvency  of  the  fund 
and  the  undoubted  adequacy  of  its  reserves,  so  the  question  of 
second  importance  is  the  premium  which  employers  should  pay 
to  secure  insurance  in  the  fund. 

As  indicated  in  the  report  of  the  manager  of  the  fund,  which 
report  is  certified  to  by  the  actuary  of  the  Commission,  during 
the  years  1916  and  1917  the  general  groups  in  the  fund  earned 
no  surplus,  whereas  the  special  groups,  with  few  exceptions,  have 
earned  profits  each  year  since  the  fund  was  established;  and  these 
surplus  earnings  of  the  special  groups  have  been  distributed  to 
the  groups  earning  them.  During  the  year  1918  all  groups,  with 
two  exceptions,  showed  considerable  and  in  some  cases  large 
profits,  part  of  which  have  been  distributed  in  the  form  of  divi¬ 
dends  and  a  larger  part  will  be  so  distributed. 

The  Industrial  Commission  has  appointed  a  committee  to  make 
an  intensive  study  of  the  experience  of  the  State  Fund  with 
respect  to  its  rates,  and  should  this  study  satisfy  the  Commission 
that  State  Fund  rates — which  are  now  on  the  average  about  15 
per  cent  lower  than  the  rates  of  stock  and  mutual  insurance  com¬ 
panies  —  could  be  safely  reduced,  this  rate  reduction  will  be 
made  effective  as  of  January  1,  1920.  This  revision  of  rates, 
should  the  experience  of  the  State  Fund  justify  a  revision,  will 
be  made  strictly  in  conformity  with  the  law,  which  provides  that 
on  January  1,  1915,  and  every  fifth  year  thereafter,  and  at  such 
other  times  as  the  Commission  in  its  discretion  may  determine, 
a  readjustment  of  the  rates  shall  be  made  for  each  of  the  several 
groups  of  employment  or  industries  and  of  each  hazard  class 
therein  which  in  the  judgment  of  the  Commission  shall  have 
developed  an  average  loss  ratio  in  accordance  with  the  experience 
of  the  Commission  in  the  administration  of  the  law,  as  shown 
by  the  accounts  kept. 

In  common  with  all  men  acting  in  the  capacity  of  directors  of 
an  insurance  institution  we  have,  as  we  should,  relied  very  largely 
upon  the  scientific  knowledge  of  our  actuary  in  determining  the 
insurance  rate  which  should  be  charged  employers  for  coverage 
in  the  State  Fund.  To  have  disregarded  the  advice  of  com¬ 
petent  actuaries  would  have  stamped  the  Commission  as  reckless 


8 


State  Insurance  Fund 


and  unworthy  of  public  confidence.  It  is  proper,  of  course,  that 
the  Commission  should  determine  the  margin  of  safety  after  the 
actuary  has  determined  the  rate  which  is  necessary  to  pay  losses 
and  to  set  up  required  reserves.  And  in  this  connection  it  is 
important  to  remember  that  the  Compensation  Law  provides  that : 

(i  The  commission  shall  make  reports  to  the  superintendent 
of  insurance  concerning  the  state  insurance  fund  at  the  same 
time  and  in  the  same  manner  as  is  required  from  mutual 
employers’  liability  and  workmen’s  compensation  corpora¬ 
tions  by  section  one  hundred  and  ninety-two  of  the  insurance 
law,  and  the  superintendent  of  insurance  may  examine  into 
the  condition  of  such  state  insurance  fund  at  any  time,  either 
personally  or  by  any  duly  authorized  examiner  appointed 
by  him,  for  the  purpose  of  determining  the  condition  of  the 
investments  and  the  adequacy  of  the  reserves  of  such  fund.” 

The  fact  that  the  State  Insurance  Fund  labored  under  great 
handicaps  in  securing  a  large  volume  of  business,  or  even  a  reason¬ 
able  share  of  the  business,  during  the  early  part  of  1914  because 
it  had  no  organization  through  which  business  could  be  secured 
and  policies  issued,  resulted  in  what  is  termed  the  best  business, 
from  an  insurance  standpoint,  being  placed  with  private  com¬ 
panies.  In  innumerable  instances  the  State  Fund  was  compelled 
to  accept  classes  of  risks  which  its  competitors  did  not  want  or 
refused  to  take.  Since  that  time  the  fund  has  each  year  increased 
its  volume  of  business  and,  with  the  exception  of  the  year  1918, 
has  increased  the  number  of  its  policyholders.  In  proof  of  the 
statement  that  larger  risks  are  being  attracted  to  the  State  Fund 
each  year  we  submit  the  following  table,  which  demonstrates 
clearly  the  transition  from  an  insurer  of  small  risks  to  an  insurer 
of  large  risks  which  has  been  going  on  year  by  year  from  1914 
to  the  present.  In  other  words,  while  the  average  premium 
income  for  each  policy  issued  in  1915  was  $152.06  the  average 
premium  income  for  each  policy  outstanding  in  1918  was  $379.50. 


Average 

Year  ending  Net  premiums  Policies  premium  per 

Dec.  31  written  in  force  policy 

*1914 .  $689,764  94  7125  $96  80 

1915  .  1,293,613  15  8507  152  06 

1916  .  1,892,561  27  9966  189  90 

1917  .  2,694,851  17  9984  269  91 

1918  .  3,332,841  88  8782  379  50 


*  Six  months’  business  only. 


Answer  to  Report  of  Jeremiah  F.  Connor  9 

It  is  true  that  in  the  year  1918  the  total  number  of  outstanding 
policies  fell  from  9,984  to  8,782.  This  decrease  of  approxi¬ 
mately  1,200  policies  in  the  year  1918  would,  unless  there  were 
a  satisfactory  explanation,  be  a  very  serious  matter.  It  is  not 
difficult,  however,  to  understand  the  net  loss  of  approximately 
1,200  policyholders  when  consideration  is  given  to  the  fact  that 
many  thousands  of  employers,  especially  employers  on  a  small 
scale  engaged  in  the  so-called  nonessential  industries,  suspended 
operations  because  there  was  no  demand  for  their  products,  or, 
more  particularly,  because  their  employees  either  entered  the  mili¬ 
tary  service  of  the  country  or  were  attracted  to  war  industries 
in  which  wages  were  abnormally  high.  While  we  do  not  have 
access  to  the  records  of  private  insurance  companies  we  neverthe¬ 
less  feel  confident  that  an  inspection  of  the  records  of  all  other 
insurance  carriers,  competitors  of  the  State  Fund,  would  show 
a  corresponding  decrease  in  the  number  of  policies  outstanding 
for  the  year  1918.  As  a  matter  of  fact,  the  records  of  the  State 
Insurance  Fund  show  that  49  per  cent  of  the  policies  cancelled 
in  1918  were  cancelled  because  the  employer  had  discontinued 
business;  28  per  cent  were  cancelled  because  of  failure  to  pay 
premiums,  and  only  11  per  cent  were  cancelled  because  the 
employer  transferred  his  insurance  to  other  carriers. 

Having  considered  and  recorded  our  opinions  in  a  general  way 
with  respect  to  the  history,  management,  and  condition  of  the 
State  Insurance  Fund  and  its  affairs,  we  desire  to  record  our 
opinion  and  our  judgment  and  to  report  our  action  with  respect 
to  certain  specific  matters  referred  to  and  in  some  instances 
criticized  by  the  commissioner  appointed  under  the  provisions  of 
the  Moreland  Act. 

Under  the  caption  te  Collection  of  Premiums  ”  the  Moreland 
Act  Commissioner  states  that  the  State  Fund  is  woefully  weak 
in  respect  to  the  collection  of  premiums  on  account  of  cancelled 
policies.  The  manager  of  the  State  Fund  explains  that  the  delay 
which  has  occurred  in  this  matter  is  due  to  the  fact  that  the  fund 
does  not  have  a  sufficient  number  of  payroll  auditors  and  account¬ 
ants  to  keep  this  work  up  to  date  at  all  times  during  the  year. 
What  the  manager  of  the  fund  states  as  to  his  request  for  an 
increased  force  is  strictly  in  accordance  with  the  fact.  Hot  only 


io 


State  Insurance  Fund 


did  the  manager  of  the  fund  each  year  request  the  Legislature 
to  provide  additional  payroll  auditors,  but  he  appeared,  with 
members  of  the  Industrial  Commission,  at  hearings  of  the  Legis¬ 
lative  Budget  Committee  and  urged  as  strongly  as  it  was  possible 
to  do,  that  the  request  of  the  Commission  for  additional  employees 
for  the  State  Fund  he  incorporated  in  the  appropriation  bill. 

What  the  Moreland  Act  Commissioner  says  with  regard  to  the 
failure  of  the  American  Locomotive  Company  to  pay  a  balance 
of  nearly  $9,000  on  account  of  a  policy  which  it  held  during  the 
year  1916  is  true,  and  the  explanation  made  by  the  manager  of 
the  fund  of  the  cause  of  failure  to  refer  the  collection  of  this 
account  to  the  Attorney-General  seems  reasonable.  While  the 
Commission  has  no  doubt  of  the  willingness  of  the  American 
Locomotive  Company  to  pay  any  balance  which  may  be  due  the 
fund,  it  has,  nevertheless,  directed  that  an  examination  be  made 
of  all  outstanding  claims  against  the  State  Fund  covered  by  the 
policy  issued  to  the  American  Locomotive  Company,  and  when  the 
liabilities  of  the  fund  under  this  policy  are  ascertained  to  set 
up  or  to  modify  reserves  already  set  up,  in  accordance  with  the 
requirements,  and  if  it  is  then  found  that  a  balance  is  due  the 
fund  from  the  American  Locomotive  Company  a  final  accounting 
will  be  asked  for.  Should  the  company  fail  to  remit  in  accord¬ 
ance  with  the  facts  as  ascertained  the  Commission  has  directed 
that  this  result  he  reported  to  it,  when  it  will  refer  the  collection 
of  the  account  to  the  Attorney-General,  in  accordance  with  the  law. 
If,  on  the  other  hand,  it  is  found  that  a  balance  is  due  the 
American  Locomotive  Company  a  check  for  the  amount  so  ascer¬ 
tained  will  be  forwarded  to  the  company  and  the  account  closed. 

Regarding  the  plan  of  grouping  adopted  in  the  State  Fund  we 
desire  to  say  that  the  question  of  the  legality  of  the  establishment 
of  individual  employments  as  special  groups  under  certain  con¬ 
ditions  was  submitted  several  years  ago  to  the  Attorney-General 
for  advice  and  opinion.  The  Attorney-General  held  that  under 
conditions  which  he  enumerated  a  single  employment  could  he  set 
up  as  a  separate  group.  It  follows,  therefore,  as  a  matter  of 
logical  sequence,  that  if  an  individual  employment  could  be  con¬ 
stituted  as  a  separate  group  a  number  of  employments  similar 
in  character  could  he  combined  and  constituted  as  a  special  group. 


Answer  to  Report  of  Jeremiah  F.  Connor  11 

This  has  been  done  and  our  action  in  doing  it  is  authorized  by  the 
law,  as  we  are  advised,  and  conforms  to  the  rules  laid  down  in  the 
interpretation  of  the  law  by  the  Attorney-General  of  the  State. 

The  commissioner  appointed  under  the  provisions  of  the  More¬ 
land  Act  raises  a  question  as  to  the  legality  and  propriety  of  the 
Commission’s  method  of  distributing  dividends  when  earned  by 
various  groups.  The  facts  are  that  dividends  have  been  dis¬ 
tributed,  when  earned,  exclusively  to  the  groups  earning  such 
dividends.  In  no  case  have  the  earnings  of  the  general  groups 
or  any  of  them  been  utilized  to  offset  deficits  in  the  special  groups 
or  any  of  them.  However,  in  order  that  there  may  be  no  ground 
for  criticism,  the  Commission  has  directed  that  hereafter,  when 
approved  by  the  Commission,  dividends  for  the  last  completed 
policy  period  in  any  group  shall  be  credited  out  of  surplus  earned 
in  such  group  and  period  after  deducting  from  the  earned  pre¬ 
miums  losses  (including  reserves  computed  as  nearly  as  may  be 
on  a  uniform  basis  for  all  groups),  expenses,  and  catastrophe 
charges,  less  any  deficit  arising  out  of  previous  periods,  and  that 
these  dividends  shall  be  such  percentages  of  the  premium  as  may 
be  agreed  upon  by  the  manager  and  actuary  of  the  State  Fund, 
subject  to  the  temporary  retention  for  future  distribution  of  not 
less  than  5  per  cent  nor  more  than  10  per  cent  of  the  semi-annual 
premium,  provided  that  the  total  surplus  remaining  to  the  credit 
of  the  group  shall  in  no  case  be  reduced  below  $2,500 ;  further, 
whenever  in  the  making  up  of  the  accounts  there  shall  be  found 
surplus  accumulated  from  periods  other  than  the  last  completed 
policy  period  amounting  to  $10,000  (or  such  less  sum  as  in  the 
judgment  of  the  manager  and  actuary  constitute  a  safe  margin 
for  contingencies)  additional  dividends,  when  approved  by  the 
Commission,  may  be  credited  in  respect  to  such  earlier  periods, 
provided  that  such  additional  dividends  shall  not  reduce  the  bal¬ 
ance  retained  as  a  margin  of  safety,  including  the  balance  retained 
from  the  surplus  of  the  last  completed  policy  period,  below  $2,500. 
After  any  group  has  been  discontinued  more  than  two  full  years, 
if  in  the  judgment  of  the  manager  and  the  actuary  conditions  war¬ 
rant  it,  a  final  accounting  may  be  made  and  in  such  final  account¬ 
ing  the  margin  above  provided  for  need  not  be  retained.  And, 
further,  the  Commission  has  ordered  that  in  the  future  the  same 


12 


State  Insurance  Fund 


methods,  as  far  as  practicable,  shall  be  adopted  for  all  groups, 
general  and  special,  with  respect  to  the  computation  and  distri¬ 
bution  of  dividends  and  the  maintenance  of  reserves. 

In  the  report  of  the  commissioner  appointed  under  the  pro¬ 
visions  of  the  Moreland  Act  considerable  space  is  devoted  to  a 
discussion  of  Group  17,  a  miscellaneous  metalware  group  treated 
by  him  under  the  head  of  “  The  Wynkoop  Service.”  The  ques¬ 
tion  of  the  legality  of  this  particular  group  has  been  submitted  to 
and  passed  upon  by  the  Chief  Counsel  of  the  State  Industrial 
Commission.  The  Chief  Counsel  has  given  it  as  his  opinion  that 
Group  17  was  legally  constituted;  that  its  constitution  is  entirely 
consistent  with  the  opinion  of  the  Attorney-General.  Counsel 
does,  however,  make  the  reservation  that  Group  17  should  be  open 
(1)  to  any  employer  in  the  same  trade  who  can  qualify  for  mem¬ 
bership  by  complying  with  conditions  as  to  size  of  payroll  and 
medical  and  safety  organization  that  aj)ply  to  the  group  as  a  whole. 
“  Membership,”  he  says,  “  in  the  group  should  not  be  limited  to 
any  one  particular  service;”  (2)  the  contingent  character  of  the 
compensation  paid  to  Mr.  Wynkoop  should  be  eliminated;  (3) 
employers  in  the  group  should  receive  from  the  Commission 
directly  periodical  statements  of  the  accident  experience,  earnings 
and  dividends  declared  for  the  group. 

Acting  upon  this  legal  opinion  the  Industrial  Commission 
instructed  the  manager  of  the  State  Fund  to  mail  directly  to  each 
of  the  employers  constituting  Group  17  notice  of  the  amount  of 
dividend  earned  by  the  group  for  the  policy  period  ending  Decem¬ 
ber  31,  1918,  and  credited  to  them  for  the  policy  period  beginning 
January  1,  1919.  This  was  done,  notwithstanding  the  fact  that 
employers  in  Group  17  had  on  file  with  the  manager  of  the  State 
Insurance  Fund  letters  instructing  the  manager  to  send  all  notices 
to  and  to  transact  all  business  regarding  their  insurance  with  the 
Wynkoop  company. 

The  Commission  has  also  decided  to  announce  that  Group  17 
is  open  to  every  employer  in  the  miscellaneous  metalware  industry 
who  can  qualify  with  respect  to  size  of  payroll  and  safety  and 
medical  service.  These  qualifications  will  be  expressly  defined 
by  resolution  of  the  Commission.  And,  further,  the  Commission 
has  decided  that  any  broker  or  service  organization  placing  busi- 


Answer  to  Report  of  Jeremiah  F.  Connor  13 

ness  in  any  group  in  the  State  Fund,  including  Group  17,  if  com¬ 
pensated  at  all  must  be  compensated  by  the  employer  upon  a  fixed 
and  not  upon  a  contingent  basis. 

It  is  important  to  say,  in  connection  with  this  action,  that  the 
Commission  has  no  evidence  which  would  justify  it  in  believing 
that  the  Wynkoop  service  has  ever  attempted  to  reduce  the  cost 
of  insurance  or  to  profit  in  any  way  at  the  expense  of  injured 
workmen;  on  the  contrary,  a  comparison  of  the  experience  of 
employers  who  were  insured  in  the  State  Fund  prior  to  the  estab¬ 
lishment  of  Group  17  and  prior  to  the  time  when  they  availed 
themselves  of  the  Wynkoop  service  with  their  experience  after 
the  establishment  of  the  Wynkoop  service,  clearly  indicates  that 
the  acceptance  of  the  Wynkoop  service  by  employers  has  been 
followed  by  a  marked  reduction  in  the  number  of  accidents  and 
of  the  serious  consequences  thereof  to  workmen  in  plants  having 
the  Wynkoop  service.  In  view  of  this  record  the  Commission, 
whose  highest  duty  it  is  to  prevent  industrial  accidents,  should 
not  deny  to  employers  the  privilege  of  placing  their  business  in 
a  special  group  solely  upon  the  ground  that  they  engage  the 
Wynkoop  service  or  any  other  organization  to  install  a  safety  and 
medical  service  and  to  represent  them  in  compensation  matters, 
and  it  is  doubtful  whether  the  Industrial  Commission  has  the 
authority  so  to  do. 

Furthermore,  the  Commission  holds  it  to  be  self-evident  that 
the  State  Fund  could  not,  unless  it  had  a  very  large  force  of 
safety  inspectors,  engineers,  and  physicians,  provide  for  every 
plant  insured  in  the  State  Fund  a  service  at  all  comparable  to  the 
intensive  service  which  has  been  furnished  by  private  organiza¬ 
tions  having  only  a  limited  number  of  clients. 

In  connection  with  the  Wynkoop  service  the  commissioner  ap¬ 
pointed  under  the  provisions  of  the  Moreland  Act  calls  attention 
to  a  “  transaction  ”  whereby  an  automobile  was  presented  by  Mr. 
Wynkoop  to  a  member  of  the  family  of  an  officer  of  the  State 
Insurance  Fund.  The  officer  referred  to  appeared  before  the 
Industrial  Commission  and  explained  this  “  transaction  ”  sub¬ 
stantially  as  follows :  A  member  of  his  family  had  been  seriously 
ill.  During  a  social  call  made  at  the  officer’s  home  by  Mr.  Wyn¬ 
koop,  who  is  an  intimate  friend  of  himself  and  his  family,  Mr. 


14 


State  Insurance  Fund 


Wynkoop  offered  to  purchase  and  pay  for  an  automobile  and 
present  it  to  the  one  who  had  been  ill.  The  gift  was  accepted 
and,  by  the  dealer  who  sold  the  car,  was  registered  in  the  name 
of  the  officer  referred  to. 

The  tender  of  this  gift,  its  acceptance  and  the  circumstances 
attending  them  were  not  concealed  in  any  way  from  the  friends 
and  associates  of  the  officer;  in  fact,  the  matter  was  reported  to 
the  chairman  of  the  Industrial  Commission  by  the  officer  himself. 
The  chairman  of  the  Industrial  Commission  felt  and  still  feels 
that  it  was  purely  a  personal  matter,  that  it  had  no  relation  to 
the  affairs  of  the  State  Fund  or  of  the  Industrial  Commission; 
and  while  the  Commission  feels  that  the  acceptance  of  this  gift 
is  open  to  criticism,  it  has  full  confidence  in  the  integrity  and 
honesty  of  the  officer  concerned  and  it  cannot  find  that  there  was 
any  improper  motive  or  unfortunate  result  in  his  consenting  to 
its  acceptance. 

In  passing  judgment  upon  this  incident  it  must  be  home  in 
mind  that  the  State  Insurance  Fund  pays  no  commissions  to  any¬ 
one,  that  it  gives  no  business  to  any  broker  or  service  organization. 
On  the  contrary,  Mr.  Wynkoop  has  placed  a  large  volume  of 
business  in  the  State  Fund  —  business  that  has  been  profitable 
and  helpful  to  the  fund. 

It  may  be  suggested  that  Mr.  Wynkoop’ s  revenues  were  in¬ 
creased  by  the  system  of  experience  rating  of  certain  risks  placed 
in  the  State  Fund,  but  this  suspicion,  if  it  exists,  would  have  little 
justification  for  the  reason  that  his  compensation  from  the  em¬ 
ployer  upon  all  risks  in  Group  17  is  precisely  the  same  whether 
the  risk  be  experience-rated  or  not.  As  a  matter  of  fact,  however, 
no  risk  in  Group  17  enjoys  the  benefit  of  experience  rating,  and 
not  all  of  the  risks  placed  by  Mr.  Wynkoop  in  the  general  groups 
are  experience-rated.  Furthermore,  none  of  the  risks  placed  by 
Mr.  Wynkoop  in  the  general  groups  receives  an  experience  rating 
unless  upon  inspection  by  the  Safety  Division  of  the  State  Fund 
such  risk  is  shown  to  have  installed  a  safety  and  medical  service 
and  to  have  complied  in  every  way  with  the  experience  rating  plan 
of  the  State  Fund.  Moreover,  experience  rating  of  insurance 
risks  is  not  limited  to  business  placed  in  the  general  groups  by  the 
Wynkoop  service.  As  a  matter  of  fact,  other  employers  who 


Answer  to  Report  of  Jeremiah  F.  Connor 


15 


qualify  with  respect  to  size  of  payroll,  safety  and  medical  service 
receive  the  beneht  of  the  experience  rating  plan.  The  Commis¬ 
sion  has  directed  that  all  employers  who  qualify  with  respect  to 
size  of  pay  roll,  safety  and  medical  service  shall  be  offered  the 
advantages  of  the  experience  rating  plan.  This  will  remove  any 
possible  ground  for  criticism  and  will,  we  hope,  encourage  the 
installation  of  improved  safety  devices  and  first  aid  and  medical 
service  in  plants  which  have  not  at  the  present  time  adopted  these 
measures. 

A  section  of  the  report  of  the  commissioner  appointed  under 
the  provisions  of  the  Moreland  Act  deals  with  and  criticizes  the 
medical  service  provided  for  injured  workmen  by  the  State  Insur¬ 
ance  Fund.  This  part  of  the  report  is  answered  and  explained 
at  length  in  the  statement  submitted  to  the  Industrial  Commission 
by  the  manager  of  the  State  Fund.  It  is  not  the  desire  of  the 
Industrial  Commission  to  excuse  errors  that  may  have  been  made 
or  to  defend  improper  conduct  on  the  part  of  anyone  connected 
with  the  affairs  of  the  Commission.  If  any  improper  practice 
has  developed  in  connection  with  the  medical  service  we  are 
anxious  to  have  concrete  information  regarding  it,  in  order  that 
correction  may  be  made  and  improved  methods  be  introduced. 

The  treatment  of  injured  employees  has  been  from  the  very 
beginning  a  question  of  importance  second  only  to  the  prevention 
of  accidents.  The  law  provides  that  medical  service  shall  he  fur¬ 
nished  to  injured  workmen  by  the  employer.  It  is  of  the  highest 
importance  that  this  medical  treatment  shall  be  prompt  and  ade¬ 
quate.  This  the  Commission  has  tried  to  insure.  The  average 
family  practitioner  is  not  well  equipped  to  treat  accident  cases 
and  such  physicians  are  not  always  free  to  respond  promptly  to  a 
call  to  render  medical  and  surgical  treatment  to  an  injured  em¬ 
ployee.  Therefore  the  manager  of  the  State  Fund,  with  the 
knowledge  and  consent  of  the  Industrial  Commission,  has  arranged 
with  Dr.  Wolff  for  the  treatment  of  a  great  many  injured  work¬ 
men  within  the  confines  of  Greater  YewT  York.  This  service  is 
utilized  as  well  by  other  insurance  carriers. 

Dr.  Wolff  has  established  a  large  number  of  dressing  stations 
located  at  convenient  points  throughout  the  greater  city.  Sur¬ 
geons  and  physicians  are  at  these  dressing  stations  ready  at  all 


16 


State  Insurance  Fund 


times  to  treat  patients  brought  to  them  or  to  visit  patients  who 
are  unable  by  reason  of  their  injuries  to  reach  the  dressing  sta¬ 
tions.  This  medical  service  the  Commission  believes  to  be 
efficient,  to  say  nothing  of  its  economy.  As  a  matter  of  fact, 
however,  the  cost  of  this  service  is  much  less  than  the  cost  to  the 
State  Fund  of  medical  service  when  patients  are  treated  by  other 
physicians  and  surgeons.  If  it  were,  as  is  suggested  in  the  report 
of  the  commissioner  appointed  under  the  Moreland  Act,  the  pur¬ 
pose  of  the  State  Fund  to  give  business  to  favorites  it  would  fol¬ 
low,  it  seems  to  us,  that  the  cost  of  such  service  would  be  greater 
than  is  the  cost  when  service  is  rendered  by  physicians  who  are 
not  classed  as  favorites  and  who  are  not  connected  with  the  dress¬ 
ing  stations.  Yet,  as  a  matter  of  fact,  the  cost  is  considerably 
less  in  cases  treated  by  the  Wolff  service  than  in  cases  treated  by 
physicians  not  connected  with  this  service.  Furthermore,  the 
records  of  the  State  Insurance  Fund  demonstrate  beyond  the 
shadow  of  a  doubt  that  the  total  cost  on  account  of  all  medical 
service  rendered  by  the  State  Fund  is  less  in  proportion  to  the 
revenues  of  the  fund  than  is  the  cost  of  medical  service  to  all 
other  insurance  carriers,  based  upon  the  revenues  received  by 
them. 

However,  in  order  that  there  may  be  no  ground  for  justifiable 
criticism  the  Commission  will  undertake  to  make  a  minute  study 
of  the  medical  service  of  the  State  Fund  and  if  defects  are  found 
to  exist  or  develop  the  Commission  will  correct  them  and  endeavor 
to  institute  a  system  of  medical  treatment  in  accident  cases  that, 
so  far  as  is  humanly  possible  and  consistent  with  the  law,  shall  be 
proof  against  attack  or  criticism. 

From  what  has  been  said  herein  the  Industrial  Commission 
has  indicated  its  disposition  to  act  favorably  upon  every  construc¬ 
tive  suggestion  which  has  been  made  by  the  Commissioner 
appointed  under  the  provisions  of  the  Moreland  Act  and  its 
willingness  to  scrutinize  with  open  mind  every  criticism  which 
has  been  embodied  in  his  report.  We  believe  that  a  perusal  of 
the  statement  prepared  by  the  Manager  of  the  State  Insurance 
Fund  will  show  clearly  that  many  of  the  conclusions  arrived  at 
by  the  Moreland  Act  Commissioner  are  at  variance  with  the 
facts  as  the  facts  are  reflected  by  the  records  of  the  fund.  Fur- 


Answer  to  Report  of  Jeremiah  F.  Connor 


17 


thermore,  we  believe  to  have  demonstrated  that  the  State  Insur¬ 
ance  Fund  is  efficiently,  honestly,  and  economically  administered; 
that  the  fund  is  solvent;  that  its  reserves  are  adequate  beyond 
peradventure ;  that  on  the  whole  the  premiums  which  employers 
have  been  required  to  pay  for  insurance  in  the  fund  were  not 
higher  than  necessary  to  give  adequate  protection  to  injured  work¬ 
men  and  to  the  dependents  of  workmen  who  have  been  killed; 
that  considering  the  handicaps  under  which  the  fund  was  estab¬ 
lished  and  has  operated  a  satisfactory  volume  of  business  has 
been  secured ;  that  the  system  of  grouping  is  both  legal  and  advan¬ 
tageous;  that  the  medical  service  of  the  fund  is  economical, 
prompt,  and  efficient;  that,  on  the  whole,  the  interests  of  work¬ 
men  and  employers  alike  have  been  safeguarded  and  promoted, 
and  that  the  wisdom  of  the  people  of  the  State  of  New  York 
in  establishing  an  Insurance  Fund  operated  without  profit  has 
been  vindicated. 

Respectfully  submitted, 

JOHN  MITCHELL,  Chairman, 
EDWARD  P.  LYON,  Commissioner 
JAMES  M.  LYNCH,  Commissioner , 
HENRY  D.  SAYER,  Commissioner , 
FRANCES  PERKINS,  Commissioner , 
State  Industrial  Commission. 


18 


State  Insurance  Fund 


Statement  of  Manager  of  Insurance  Fund  as  made  to 
Industrial  Commission 


July  2,  1919. 

Gentlemen. —  In  accordance  with  your  request,  I  have  exam¬ 
ined  carefully  the  report  to  Governor  Alfred  E.  Smith  by 
Jeremiah  F.  Connor,  Esq.,  Moreland  Act  Commissioner,  on  the 
State  Insurance  Fund  of  the  State  of  New  York,  in  connection 
with  the  management  and  affairs  of  the  State  Industrial  Com¬ 
mission,  and  I  respectfully  submit  the  following  statement  con¬ 
cerning  the  matters  discussed  in  this  report. 

Condition  of  State  Fund 

The  financial  condition  of  the  State  Fund  at  the  present  time 
is  conceded  by  Mr.  Connor  to  be  u  in  an  enviable  position.”  Yet 
he  contends  that  the  State  Fund  is  badly  managed.  The  ad¬ 
mittedly  enviable  condition  of  the  State  Fund  would  appear  to 
create  at  least  a  presumption  that  the  management  has  been  in 
no  way  incompetent. 

The  last  semi-annual  report  of  the  State  Fund  shows  assets 
of  roundly  five  and  one-half  million  dollars  and  a  surplus  of  over 
$800,000,  with  reserves  of  unquestionable  adequacy  for  losses, 
expenses  and  contingencies.  The  premium  writings  for  1918 
amounted  to  $3,33*2.841.88.  The  State  Fund  is  the  second  largest 
carrier  of  compensation  insurance  in  the  State;  its  premium 
volume  is  larger  than  that  of  any  of  the  twenty-one  stock  com¬ 
panies,  with  a  single  exception,  and  approaches  the  combined 
premium  income  of  all  the  fifteen  mutual  companies. 

The  State  Fund  has  been  built  up  to  its  present  imposing  size 
and  enviable  financial  condition  in  less  than  five  years.  It  began 
business  July  1,  1914,  with  no  capital  stock  and  no  initial  fund 
contributed  by  the  State.  The  only  assistance  given  it  by  the 
State  was  the  payment  of  the  management  expenses  for  the  first 
two  years.  The  State  Fund  has  had  to  meet  ceaseless  and  re¬ 
sourceful  competition  on  the  part  of  stock  and  mutual  companies, 
with  their  army  of  agents,  brokers  and  field  representatives.  While 


Answer  to  Report  of  Jeremiah  F.  Connor 


19 


these  companies  compete  to  some  extent  among  themselves,  they 
are  virtually  united  in  their  operations  against  the  State  Fund. 
The  representatives  of  the  private  companies  have  not  hesitated 
to  circulate  the  most  damaging  misrepresentations  concerning 
the  condition  of  the  State  Fund,  its  terms  of  insurance  and  the 
service  to  policyholders. 

The  State  Fund  has  been  unable  to  employ  solicitors  for  the 
purpose  of  getting  new  business  and  protecting  old  business  against 
raids  by  its  competitors. 

The  State  Fund  has  been  handicapped  by  its  inability  to  write 
other  forms  of  insurance  needed  by  employers,  in  addition  to  com¬ 
pensation  coverage,  such  as  public  liability. 

The  State  Fund  has  had  to  overcome  the  natural  prejudice  and 
scepticism  on  the  part  of  many  employers  toward  a  State-con- 
ducted  enterprise  —  a  difficulty  which  has  been  aggravated 
enormously  by  the  persistent  misrepresentations  of  its  competitors. 

Notwithstanding  these  handicaps,  the  State  Fund  has  grown 
and  prospered.  It  came  safely  through  the  extremely  critical 
period  of  1916  and  1917,  when  the  number  and  frequency  of 
industrial  accidents  increased  sharply,  in  consequence  of  war 
conditions,  and  the  stock  companies,  as  a  whole,  either  lost  money 
or  barely  broke  even.  When  the  crisis  was  passed  and  the  ex¬ 
ceptionally  favorable  experience  of  1918  produced  large  surplus 
earnings,  it  was  wisely  determined  to  use  these  earnings  for  the 
purpose  of  strengthening  the  reserves  in  various  ways,  buttressing 
the  State  Fund  at  every  angle  against  a  possible  recurrence  of 
adverse  experience,  with  a  view  to  making  it  absolutely  secure 
and  solvent  beyond  the  remotest  chance  of  financial  embarrass¬ 
ment  in  the  future. 

Now  the  State  Fund  is  criticized  because  its  reserves  are  too 
high  and  its  surplus  too  large. 

The  record  of  the  State  Fund  is  in  itself  a  concrete  answer  to 
the  general  charge  of  mismanagement  made  in  Mr.  Connor’s  re¬ 
port.  Such  results  do  not  ordinarily  connote  bad  management. 
Indeed,  the  accomplishment  of  such  results  is  not  compatible  with 
bad  management.  Nor  can  such  results  be  explained  away,  as 
occurring  through  sheer  good  luck  even  in  spite  of  bad 
management. 


20 


\ 

State  Insurance  Fund 

Collection  of  Premiums 

Mr.  Connor  declares: 

u  The  success  of  any  company  writing  compensation  or 
liability  insurance  depends  upon  the  ability  to  collect 
premiums.  The  State  Insurance  Fund  is  woefully  weak  in 
this  respect.” 

The  ability  to  collect  premiums  is  unquestionably  a  large  factor 
in  the  success  of  a  compensation  insurance  company.  It  must 
he  frankly  conceded  also  that  the  State  Fund  is  unable  to  collect 
premiums  with  as  much  promptness  and  thoroughness  as  could  be 
desired,  by  reason  of  an  inadequate  working  force  in  the  account¬ 
ing  and  payroll  auditing  division.  The  manager  has  repeatedly 
emphasized  the  need  of  additional  employees  in  this  division  in 
presenting  his  annual  budget  recommendations. 

Mr.  Connor  refers  to  the  matter  of  collections  on  cancelled 
policies,  and  states: 

“For  example,  the  State  Fund  has  approximately  1500 
cancelled  policies  covering  a  period  from  July  1,  1914,  to 
date,  in  which  the  payrolls  have  not  been  audited  nor  bills 
rendered  for  the  amount  due.  In  addition,  about  a  month 
ago  there  were  500  cases  of  these  cancelled  policies  in  which 
the  payrolls  had  been- audited  but  in  which  bills  had  not  been 
sent  out.  These  cases  had  been  ready  for  bills  for  an  aver¬ 
age  period  of  about  four  months  and  the  man  in  charge  of 
the  work  admitted  that  one  man  could  have  sent  out  the 
entire  number  of  bills  in  eight  days,  notwithstanding  which 
nothing  was  being  done.  The  following  is  an  example  of 
the  ways  this  work  is  done.  The  policy  of  the  Ansonia 
Clock  Company  was  cancelled  December  31,  1917.  The 
payroll  was  audited  in  November,  1918,  showing  a  balance 
due  the  State  Fund  of  $958.64.  Up  to  April  1,  1919,  a 
bill  for  this  amount  had  not  been  sent  out.” 

This  statement  is  considerably  overdrawn.  At  no  time  during 
the  past  twelve  months  have  there  been  1,500  cancelled  policies 
which  had  not  received  the  necessary  attention.  About  April  1st, 
when  Mr.  Connor  visited  the  office  of  the  State  Fund  to  inquire 
into  this  matter,  there  were  approximately  800  cancelled  policies 


Answer  to  Report  of  Jeremiah  F.  Connor 


21 


on  which  audits  and  collections  had  not  been  made.  Of  this 
total,  about  200  accounts  had  been  audited  and  prepared  for  final 
billing,  and  approximately  600  had  not  been  audited.  At  that 
time  the  office  force  was  engaged  in  sending  out  the  six  months’ 
bills  on  the  current  active  accounts,  and  this  work  had  been  given 
the  right  of  way.  Later  in  the  month  of  April,  three  temporary 
clerks  were  assigned  to  the  office  of  the  State  Fund  to  assist  in 
clearing  up  the  arrears  on  cancelled  policy  accounts,  and  the 
situation  with  respect  to  this  matter  has  been  greatly  improved. 
On  June  10th  there  were  approximately  250  cancelled  policies 
on  which  final  bills  had  not  been  sent.  These  accounts,  however, 
had  all  been  examined  within  the  preceding  ten  days  in  the 
accounting  and  payroll  auditing  division  and  had  been  assigned 
to  auditors  or  had  been  followed  up  with  letters  to  the  policy¬ 
holders  requesting  the  necessary  data  for  closing  the  accounts. 
The  case  of  the  Ansonia  Clock  Company  is  exceptional,  not 
typical.  The  delay  in  auditing  this  account  was  due  to  a  shortage 
of  payroll  auditors.  A  bill  for  the  balance  due  the  State  Fund 
has  been  sent  to  this  company,  and  the  amount  has  been  paid 
in  full. 

Reports  to  Attorney -General 

Mr.  Connor  charges  that  “  there  is  much  laxity  in  obtaining 
statements  from  the  employers  in  relation  to.  payrolls  as  required 
by  section  101,  and  there  is  also  much  laxity  in  referring  unpaid 
premiums  to  the  Attorney-General  for  collection,  as  required  by 
section  99  of  the  act.” 

Any  delays  in  obtaining  payroll  reports  from  policyholders 
are  due  to  lack  of  a  sufficient  number  of  employees  to  keep  fully 
abreast  of  the  office  requirements  at  all  times.  It  is  the  practice 
to  refer  accounts  in  which  payment  is  not  made  within  thirty 
days  after  final  billing  to  the  Attorney-General  for  collection, 
as  required  by  law.  The  State  Fund  co-operates  with  the  office 
of  the  Attorney-General  in  locating  the  policyholders  and  serving 
summons.  After  a  conference  with  the  Deputy  Attorney-General, 
in  charge  of  State  Fund  matters,  it  was  decided  that  the  serving 
of  summons  in  this  city  could  be  performed  more  effectively  by 
persons  assigned  from  the  office  of  the  State  Fund  than  from  the 
office  of  the  Attorney-General,  as  the  employees  from  this  office 
are  able  to  locate  policyholders  more  quickly  than  process  servers 


22 


State  Insurance  Fund 


from  the  office  of  the  Attorney-General,  who  could  not  devote  alL 
their  time  to  this  work.  The  Deputy  Attorney-General  has 
repeatedly  commended  the  work  performed  through  the  office  of 
the  State  Fund  in  assisting  in  the  collection  of  overdue  accounts 
and  the  service  of  summons. 

As  an  incident  of  alleged  laxity  in  referring  unpaid  accounts 
to  the  Attorney-General,  Mr.  Connor  cites  the  case  of  the  American 
Locomotive  Company,  which,  he  states,  has  “owed  the  State 
Insurance  Fund  nearly  $9,000  since  December  31,  1916,  and  this 
amount  has  never  been  referred  to  the  Attorney-General  for 
collection.  ” 

It  is  true  that  the  account  of  the  American  Locomotive  Com¬ 
pany,  which  was  insured  in  the  State  Fund  for  the  year  1916 
and  then  withdrew,  shows  an  apparent  balance  of  $8,726.86  due 
the  State  Fund.  This  balance  is  small  as  compared  with  the 
amount  of  premium  paid  to  the  State  Fund,  which  was 
$103,494.60.  The  final  adjustment  on  this  account,  which  was 
carried  in  a  special  group,  has  not  been  made,  as  certain  accident 
cases  on  which  reserves  had  been  set  up  provisionally  have  not 
been  closed  so  that  the  exact  amount  of  the  necessary  reserves 
could  be  determined.  It  is  quite  possible  that  the  final  adjust¬ 
ment,  when  all  cases  have  been  closed,  will  show  a  small  balance 
due  to  the  American  Locomotive  Company.  It  is  necessary  for 
the  State  Fund  to  set  up  on  open  cases  sufficient  reserves  to  pro¬ 
tect  it  against  unfavorable  developments,  and  a  later  revision 
of  the  reserves,  when  the  exact  extent  of  the  liability  in  such  cases 
has  been  fixed  by  final  awards  of  the  Commission,  usually  results 
in  the  release  of  some  part  of  the  provisional  reserves.  Under 
the  circumstances,  it  would  have  been  hasty  and  ill-advised  to 
report  this  account  to  the  Attorney-General  ‘  for  collection.  It 
should  be  added  that  this  case  is  exceptional.  Only  one  other 
account  has  been  allowed  to  stand  without  being  reported  to  the 
Attorney-General.  That  was  the  account  of  the  Standard  Oil 
Company,  which  was  held  open,  pending  final  adjustment,  for 
some  time,  in  the  same  manner  and  for  the  same  reasons. 

Need  of  More  Payroll  Auditors 

Mr.  Connor  concedes  that  the  State  Fund  may  not  have  a 
sufficient  force  of  payroll  auditors,  but  intimates  that  the  manage- 


Answer  to  Report  of  Jeremiah  F.  Connor 


23 


ment  has  not  taken  the  proper  steps  to  remedy  this  condition. 
He  states: 

“  The  State  Insurance  Fund  pleads  in  extenuation  of  these 
conditions  that  it  has  insufficient  help  to  properly  audit  pay¬ 
rolls,  and  that  appropriations  for  additional  payroll  auditors 
have  been  denied  by  the  Legislature.  This  may  be  true  to 
some  extent,  but  the  State  Fund  has  never  reported  its  exact 
condition  justifying  its  appeal  for  additional  help.  It  is 
one  thing  to  ask  for  payroll  auditors  and  another  to  disclose 
the  exact  condition  requiring  the  same.” 

The  manager  of  the  State  Fund  has  made  requests  for  addi¬ 
tional  payroll  auditors,  bookkeepers  and  clerks  in  his  annual 
budget  recommendations,  and  has  appeared  each  year  before  the 
Legislative  Finance  Committee  to  urge  the  adoption  of  his  recom¬ 
mendations.  In  any  statement  concerning  office  conditions,  used 
for  this  purpose,  the  manager  has  naturally  had  some  regard 
for  the  fact  that  every  disclosure  regarding  the  handicaps  of  the 
State  Fund  is  seized  upon  and  exploited  by  its  competitors.  It 
may  be  interesting  here  to  review  the  recommendations  of  the 
manager  with  respect  to  increase  of  force  and  the  results  as  shown 
by  the  number  of  additional  employees  granted  in  the  annual 
appropriation  bill.  For  the  fiscal  year,  July  1,  1917,  to  July  1, 
1918,  the  manager  asked  for  23  additional  payroll  auditors,  book¬ 
keepers  and  clerks;  16  were  granted.  For  the  year  1918  to  1919 
the  requests  called  for  18  additional  employees  of  these  classes; 
the  number  provided  was  15.  For  the  year  1919  to  1920  23 
additional  employees  were  requested,  and  not  one  was  granted. 
The  requests  of  the  manager  for  each  year  represented  the  absolute 
minimum  of  the  office  requirements.  The  following  extracts 
from  the  statements  accompanying  the  budget  recommendations 
of  the  manager  are  presented  as  illustrating  the  urgency  with 
which  he  has  stressed  the  recommendations  in  successive  years: 
Budget  of  1916-1917 : 

“  With  respect  to  the  proposed  additions  to  the  force,  it 
should  be  pointed  out  that,  while  the  business  of  the  State 
Fund  has  nearly  doubled  in  the  last  two  years,  the  number 
of  employees  has  been  reduced  through  lack  of  adequate 
appropriations.  The  present  force  can  hardly  be  termed 


24 


State  Insurance  Fund 


more  than  75  per  cent  efficient,  not  because  of  the  shortcom¬ 
ings  of  individual  employees,  hut  because  of  the  numerical 
insufficiency  of  the  staff,  as  a  whole.  The  problem  imme¬ 
diately  confronting  the  State  Fund  is  how  to  improve  the 
efficiency  of  the  service.  The  State  Fund  has  secured  a  large 
volume  of  business,  hut  it  cannot  retain  the  best  portion  of 
this  business  unless  the  service  that  it  renders  to  policy¬ 
holders  is  on  a  par  with  that  of  well  managed  private 
companies.” 

Budget  of  1918-1919: 

“  The  State  Fund  has  suffered  much  injury  in  the  past 
through  lack  of  appropriations  adequate  to  enable  the  man¬ 
ager  to  take  proper  measures  to  keep  down  the  disbursements, 
on  the  one  hand,  and  to  bring  in  the  full  premium  income, 
on  the  other  hand.  The  lesson  brought  home  by  the  report 
of  its  financial  condition,  recently  submitted,  should  be 
heeded,  and  the  management  should  be  given  every  dollar 
that  is  requested  to  meet  the  present  needs  of  the  situation. 
There  should  be  no  paring  down  of  the  requirements  as  set 
forth  in  the  budget  proposals  for  the  coming  fiscal  year. 
Unless  these  requirements  are  met  in  full,  the  management 
of  the  State  Fund  cannot  be  held  responsible  for  the 
consequences.” 

Budget  of  1919-1920: 

u  The  present  force  of  the  payroll  auditing  division  is  not 
sufficient  to  enable  the  State  Fund  to  make  the  number  of 
audits  required  to  bring  in  the  full  premium  income.  Experi¬ 
ence  has  shown  the  vital  importance  of  systematic  auditing 
in  order  to  collect  the  premiums  due  from  employers.  Each 
additional  auditor  of  payrolls  brings  in  approximately  ten 
times  the  amount  of  his  salary  and  expenses.  Indeed,  there 
seems  to  be  almost  no  limit  to  the  possibility  of  increasing 
the  premium  income  through  more  frequent  and  intensive 
auditing  of  policyholders7  accounts.77 

Notwithstanding  this  plea,  the  State  Fund  was  refused  by  the 
Legislature  any  additional  payroll  auditors  or  other  employees 
for  the  coming  fiscal  year. 


Answer  to  Report  of  Jeremiah  F.  Connor 


25 


Efficiency  of  Office  Force 

Mr.  Connor  furthermore  expresses  his  belief  “  that  much  better 
work  could  be  performed  by  the  present  force.’’ 

This  is  merely  a  matter  of  opinion.  It  is  the  opinion  of  the 
manager  that  the  efficiency  of  the  State  Fund  force  will  compare 
favorably  with  that  of  any  insurance  office. 

Mr.  Connor  also  criticizes  the  practice  of  assigning  employees 
for  work  not  covered  by  their  civil  service  titles.  He  states: 

“  The  employees  in  this  department  are  not  as  a  general 
rule,  performing  the  work  indicated  by  their  civil  service 
titles.  In  an  emergency  any  employee  can  be  called  upon 
to  assist  in  the  collection  of  premiums.” 

It  is  true  that  employees  are  not  always  doing  work  that  cor¬ 
responds  to  their  civil  service  titles.  It  is  necessary  and  proper 
to  distribute  the  available  working  force  among  the  different 
divisions  according  to  the  immediate  and  urgent  needs  of  each. 
There  is  no  other  way  to  get  the  work  done  with  any  degree  of 
promptness  and  thoroughness. 

Again,  Mr.  Connor  charges  that  “  there  is  an  apparent  over¬ 
loading  of  employees  in  some  directions,”  and  cites  the  following 
case: 

“  One  Raymond  Appolonio  was  appointed  as  a  statistical 
clerk  during  the  past  year.  Prior  to  his  appointment  this 
man  was  a  resident  of  Boston,  Mass.  In  his  application 
for  the  examination  he  said,  however,  that  he  had  resided 
in  Hew  York  State  for  a  period  of  five  years  and  he  gave 
as  his  residence  the  street  and  number  of  the  manager  of 
the  State  Insurance  Fund.  I  found  upon  examination  that 
he  was  designated  as  a  person  to  serve  summons  sent  down 
by  the  Attorney-General  in  actions  to  collect  unpaid  pre¬ 
miums.  The  following,  received  from  his  immediate 
superior,  is  an  example  of  the  work  performed  by  him  as  a 
statistical  clerk: 

“‘Mar.  10,  2  trips  to  618  W.  58th  St.,  Purcell  and  Gil- 
feather  —  to  serve  summons. 

“‘1  trip  to  29  Broadway,  General  Contracting  Co. —  to 
make  collection.’ 

“The  service  of  summons  is  work  which  should  be  per- 


26 


State  Insurance  Fund 


formed  by  the  Attorney-General,  and  a  telephone  communi¬ 
cation  to  a  responsible  employer  would  be  just  as  efficacious 
in  making  a  collection  as  a  trip  to  29  Broadway.’7 

The  appointment  of  this  employee  was  entirely  regular  in  every 
respect.  He  was  formerly  a  resident  of  Boston,  but  had  not  lived 
there  for  six  years.  Tie  gave  his  residence  as  Hew  York  State, 
for  he  made  his  principal  headquarters  here  for  at  least  five  years. 
At  the  time  his  application  for  examination  was  made,  he  was 
living  in  the  family  of  the  manager  of  the  State  Fund,  who  had 
known  him  in  Boston.  He  was  appointed  at  a  salary  of  $1,020, 
later  increased  to  $1,200.  He  was  designated  to  serve  summons 
and  to  make  collections,  as  he  was  particularly  fitted  for  this  work 
by  his  past  experience.  It  has  already  been  explained  that  the 
Deputy  Attorney-General  requested  the  co-operation  of  the  State 
Fund  in  the  matter  of  serving  summons  and  making  collections. 
The  suggestion  “  that  a  telephone  communication  to  a  responsible 
employer  would  be  just  as  efficacious  as  a  visit”  indicates  a  lack 
of  familiarity  with  the  habits  and  tactics  of  some  employers  who 
refuse  to  pay  insurance  premiums  upon  demand  in  writing.  In 
the  particular  case  cited  by  Mr.  Connor,  the  policy  of  the  State 
Fund  had  been  cancelled  as  of  January  6,  1918,  and  the  final 
adjustment  of  the  account  had  been  made  May  21,  1918.  The 
employer  failed  to  make  payment  and  made  no  reply  whatever  to 
several  letters  addressed  to  him  by  the  State  Fund.  It  became 
necessary  to  send  a  collector,  and  no  payments  were  made  except 
when  the  State  Fund  collector  called. 

With  reference  to  the  conditions  in  the  office  of  the  State  Fund, 
as  alleged  in  Mr.  Connor’s  report,  it  is  pertinent  to  call  attention 
to  the  effect  of  the  war  upon  the  office  force.  The  State  Fund 
lost  twenty-seven  employees  through  voluntary  enlistment  or  draft. 
Among  these  were  several  of  the  most  valuable  members  of  the 
organization.  It  was  practically  impossible  to  find  competent 
substitutes  for  the  trained  employees  thus  lost,  especially  as 
appointments  could  be  made  only  temporarily,  for  the  duration 
of  the  military  vacancv  in  each  case.  The  task  of  filling  the  mili¬ 
tary  vacancies  was  rendered  doubly  difficult  by  the  restrictions  of 
the  civil  service  and  the  budget.  The  State  Fund  is  obliged  to 
compete  with  private  insurance  companies  for  employees,  as  well 


Answer  to  Report  of  Jeremiah  F.  Connor 


27 


as  for  business,  and  in  such  competition  is  severely  handicapped 
by  restrictions  from  which  its  competitors  are  free.  The  lack 
of  elasticity  and  adaptability  in  the  administrative  conditions 
imposed  upon  the  State  Fund  under  the  budget  and  the  civil 
service  was  strikingly  illustrated  during  the  war  period.  Despite 
these  conditions  a  reasonable  degree  of  efficiency  was  maintained. 

The  Question  of  Rates 

Mr.  Connor  declares  that  “  the  State  Fund  has  been  a  failure 
as  a  check  on  the  rates  of  the  insurance  companies.” 

This  is  a  matter  of  opinion.  It  should  be  pointed  out  here  that 
the  rates  of  the  State  Fund  are  approximately  15  per  cent  lower 
than  the  rates  of  private  companies  ;  that  the  State  Fund  did  not 
apply  the  5  per  cent  increase  of  rates  put  into  effect  by  the  com¬ 
panies  January  1,  1918;  that  the  State  Fund  has  declared  divi¬ 
dends  of  10  per  cent  in  all  the  general  groups,  and  supplementary 
dividends  of  20,  10  and  25  per  cent  in  three  of  these  groups,  as 
will  hereafter  be  explained. 

Mr.  Connor  complains  that  the  State  Fund  rates  “  remain  at 
the  same  high  level.” 

The  fact  is  that  the  present  rates  have  been  in  effect  on  all  of 
the  business  of  the  State  Fund  only  since  January  1,  1918.  The 
experience  of  1916  demonstrated  the  inadequacy  of  the  old  rates 
and  called  for  a  general  increase.  The  year  1918,  during  which 
the  new  rates  were  in  operation,  was  an  exceptional  year.  For 
that  year  these  rates  yielded  a  large  surplus,  due  primarily  to 
abnormal  conditions  with  respect  to  payrolls  and  wages.  The 
business  outlook  at  the  close  of  the  year  was  most  uncertain. 
It  would  have  been  well-nigh  foolhardy  to  reduce  the  rates  at  that 
time  on  the  basis  of  the  unusual  experience  of  the  single  year 
1918. 

At  the  present  time  the  business  outlook  justifies  the  expecta¬ 
tion  that  the  rates  may  be  safely  reduced  to  some  extent  in  the 
next  revision,  which  under  the  law  must  be  made  to  go  into  effect 
January  1?  1920.  The  Workmen’s  Compensation  Law  provides, 
in  section  97,  that  “  on  January  1,  1915,  and  every  five  years  there¬ 
after  *  *  *  a  readjustment  of  the  rates  shall  be  made  for 

each  of  the  several  groups  of  employment  or  industries  and  of 


28 


State  Insurance  Fund 


each  hazardous  class  therein  which  in  the  judgment  of  the  com¬ 
mission  shall  have  developed  an  average  loss  ratio  in  accordance 
with  the  experience  of  the  commission  in  the  administration  of 
the  law  as  shown  by  the  accounts  kept  as  herein  provided.”  The 
end  of  the  live-year  period  following  the  first  rate  revision  of 
January  1,  1915,  will  fall  on  January  1,  1920.  In  the  light  of 
the  present  industrial  conditions  and  prospects  it  seems  safe  to 
forecast  a  downward  revision  of  State  Fund  rates  in  the  readjust¬ 
ment  that  must  he  made  in  accordance  with  this  requirement  of 
the  law. 

With  further  reference  to  the  matter  of  rates,  a  comparison 
between  the  rates  of  the  Hew  York  State  Fund  and  the  Ohio 
State  Fund,  which  was  worked  out  by  the  manager  and  the 
actuary  of  the  Hew  York  State  Fund,  in  reply  to  an  inquiry  by 
Mr.  Connor,  is  extremely  interesting.  In  this  comparison  due 
allowance  was  made  for  certain  differences  in  operating  conditions 
of  the  two  State  Funds,  such  as  the  fact  that  the  manual  rates 
of  the  Ohio  State  Fund  are,  in  general,  minimum  rates,  subject 
to  penalty  increases  for  adverse  experience,  while  the  manual 
rates  of  the  Hew  York  State  Fund  are  maximum  rates,  subject 
to  merit  reductions  for  safety  equipment  and  favorable  experience. 
It  appears  that  on  this  basis  of  comparison  the  rates  of  the  Hew 
York  State  Fund  average  somewhat  less  than  the  corresponding 
rates  of  the  Ohio  State  Fund.  In  short,  the  result  of  this  com¬ 
parative  analysis  of  rates  indicates  that,  under  the  same  operating 
conditions,  the  net  cost  to  policyholders  of  the  Hew  York  State 
Fund  would  have  been  slightly  less  than  the  net  cost  to  the  policy¬ 
holders  of  the  Ohio  State  Fund.  The  details  of  the  comparison 
are  embodied  in  a  communication  to  Mr.  Connor  by  the  manager 
of  the  Hew  York  State  Fund  which  is  appended  to  this  report. 

Number  of  Policyholders 

Mr.  Connor  calls  attention  to  the  decline  in  the  number  of 
policyholders  of  the  State  Fund  in  1917.  “  While  the  volume 

of  premium  income  increased  very  much  during  the  past  year, 
due  to  war  conditions,  the  number  of  employers  insured  in  the 
State  Fund  are  about  1,000  less  than  in  1917.” 

In  the  annual  report  of  the  manager  of  the  State  Fund  for 
1918  this  phenomenon  is  explained  as  follows: 


Answer  to  Report  of  Jeremiah  F.  Connor 


29 


“  In  one  respect  it  would  appear  that  the  State  Fund 
lost  ground  during  the  year,  as  the  number  of  policyholders 
fell  from  9,984  to  8,782.  When  the  causes  of  this  falling 
off  are  examined,  however,  the  loss  is  found  to  be  apparent 
rather  than  actual.  The  decline  was  due  mainly  to  two 
causes;  first,  the  retirement  from  business  of  small 
employers  in  non-essential  industries  on  account  of  war  con¬ 
ditions;  second,  the  cancellation  of  policies  for  non-payment 
of  premiums,  in  consequence  of  more  systematic  attention 
to  overdue  accounts.  Notwithstanding  the  decline  in  the 
number  of  policyholders,  the  volume  of  semi-annual  pre¬ 
miums  in  force  increased  from  $810,576.79  to  $940,902.83. 
That  is,  measured  by  the  volume  of  premiums,  the  new  busi¬ 
ness  written  during  the  year  more  than  offset  the  loss  of 
business  through  withdrawals  and  cancellations.  In  short, 
there  took  place  a  substitution  of  large  for  small  risks.” 

Individual  or  Special  Groups 

It  may  be  well  before  taking  up  the  criticisms  of  Mr.  Connor 
concerning  the  individual  or  special  groups,  to  offer  a  general 
explanation  of  the  special  group  plan  as  operated  by  the  State 
Fund. 

The  Workmen’s  Compensation  Law  (section  2)  divided  hazard¬ 
ous  employments  subject  to  the  law  into  forty- two  groups.  The 
law  provided  further  (section  95)  that  employments  coming  under 
its  provisions  should  be  divided  for  purposes  of  the  State  Ffind 
into  the  groups  set  forth  in  section  2,  and  that  separate  accounts 
should  be  kept  of  the  amounts  collected  and  expended  in  respect 
to  each  such  group  for  convenience  of  determining  equitable  rates. 
The  Commission  was  empowered  (section  95)  to  rearrange  any 
of  the  groups  set  forth  in  section  2  by  withdrawing  any  employ¬ 
ment  embraced  in  it  and  transferring  it  wholly  or  in  part  to  any 
other  group,  and  from  such  employments  to  set  up  new  groups 
at  its  discretion.  Provision  was  made  (section  97)  for  the  decla¬ 
ration  and  distribution  of  dividends  according  to  groups. 

The  Commission,  exercising  the  authority  conferred  by 
section  95  of  the  law,  to  rearrange  the  original  groups  has  com¬ 
bined  the  forty-two  groups  into  six  large  groups  for  purposes  of 
keeping  accounts  and  computing  dividends,  and  has  also  set  up 


30 


State  Insurance  Fund 


various  special  groups  composed  in  some  cases  of  individual  risks  j 
and  in  other  cases  of  a  number  of  related  risks.  The  special  j 
groups,  which  at  present  number  twenty,  fall  into  three  classes:  ! 
First,  purely  individual  groups,  such  as  the  International  Paper  j 
Company  and  the  Lackawanna  Steel  Corporation;  second,  trade  : 
groups,  including  all  employers  in  the  same  branch  of  industry, 
such  as  the  furniture  manufacturers’  group  and  the  cement  manu-  ] 
facturers’  group;  third,  trade  groups,  including  a  number  of 
employers  in  the  same  branch  of  industry  who  have  taken  special  j 
measures  for  accident  prevention  and  have  a  safety  organization  | 
approved  by  the  State  Fund,  such  as  the  miscellaneous  metal-  | 
ware  group  and  the  foundry  and  machine  shop  group. 

The  method  of  keeping  accounts  and  computing  dividends  for 
the  special  groups  is,  in  brief,  as  follows:  Each  member  is 
charged  an  initial  premium  based  on  the  manual  or  schedule  rates 
of  the  State  Fund  applicable  to  the  risk.  After  each  policy  period 
the  State  Fund  charges  against  the  group  premium,  first,  the 
amount  of  the  loss  payments  on  account  of  accidents  occurring 
during  the  period;  second,  the  amount  of  the  loss  reserves 
required  to  carry  all  claims  on  account  of  such  accidents  to  full 
maturity;  third,  the  proportionate  share  of  all  expenses  incurred 
by  the  State  Fund;  fourth,  the  contribution  to  the  legal  catas¬ 
trophe  surplus,  amounting  to  5  per  cent  of  the  premium.  At 
the  end  of  each  policy  period  the  premiums  of  the  members  are 
readjusted  on  the  basis  of  their  actual  payroll  expenditures  as 
ascertained  by  report  or  audit.  Any  balance  of  the  earned  pre- 
mium  of  the  group  remaining  after  deduction  of  the  charges 
enumerated  is  credited  pro  rata  to  the  members  on  the  next  install¬ 
ments  of  premium  due  the  State  Fund,  in  accordance  with  the 
provisions  of  section  97  of  the  law  relating  to  the  declaration 
and  distribution  of  dividends.  It  is  the  practice  in  making  this 
adjustment  to  credit  a  partial  dividend  in  the  first  statement  to 
the  members  of  a  special  group,  and  at  a  later  date  to  determine 
the  final  dividend  credit  after  the  experience  has  developed  suffi¬ 
ciently  to  disclose  the  exact  extent  of  the  liability  in  each  case, 
and  thus  to  afford  a  basis  for  setting  up  the  proper  amounts  of 
loss  reserves.  That  is,  the  account  is  held  open  subject  to  further 
readjustment  until  such  time  as  all  cases  can  be  closed  and  final 
reserves  set  up. 


Answer  to  Report  of  Jeremiah  F.  Connor 


31 


The  general  purpose  of  this  plan  is  to  segregate  large  individual 
risks  and  to  combine  smaller  risks  of  identical  or  similar  hazard 
in  such  way  as  to  enable  the  employers  to  obtain  the  benefit  of  a 
favorable  experience,  particularly  of  any  reduction  in  insurance 
costs  effected  by  their  individual  or  co-operative  efforts  and  thus 
to  bring  to  hear  an  effective  incentive  to  adopt  measures  for  acci¬ 
dent  prevention.  The  general  groups  are  miscellaneous  in  their 
composition  and  employers  placed  in  these  groups  are  forced  to 
share  the  benefit  of  improved  safety  equipment  and  organization 
in  their  own  plants  with  other  employers  whose  risks  are  inher¬ 
ently  more  hazardous,  and  who  may  give  little  or  no  attention 
to  safety  matters.  It  is  equitable  that  employers  who  are  willing 
to  incur  large  expenditures  for  purposes  of  reducing  the  hazards 
of  their  plants  and  the  cost  of  their  insurance,  should  be  placed 
in  special  groups  under  an  arrangement  that  will  enable  them  to 
secure  some  return  from  such  expenditures  in  the  form  of  divi¬ 
dends  based  on  their  own  experience.  The  special  grouping  sup¬ 
plies  a  constant  incentive  to  further  efforts  to  prevent  accidents 
and  reduce  insurance  costs.  The  plan  is  thus  equitable  in  prin¬ 
ciple  and  beneficial  in  practice,  through  its  stimulative  effect  upon 
accident  prevention.  Further  information  concerning  this  plan 
will  be  found  in  a  memorandum  appended  to  this  report. 

Advantages  of  Plan 

The  question  of  the  advisability  or  expediency  of  special  group¬ 
ing  should  be  judged  in  the  light  of  the  all-important  considera¬ 
tion  that  the  New  York  State  Fund  is  competitive  and  not 
monopolistic.  The  State  Fund  is  in  open  competition,  not  only 
with  stock  insurance,  but  with  mutual  insurance  and  self-insur¬ 
ance.  If  the  State  Fund  is  to  get  and  hold  any  considerable 
volume  of  the  desirable  class  of  business  that  is  naturally  attracted 
toward  mutual  and  self-insurance,  it  must  be  able  to  offer  to 
employers  so  inclined  a  proposition  that  will  compete  with  the 
advantages  which  are  promised  by  mutual  and  self-insurance. 

The  chief  attraction  of  self-insurance  for  a  large  employer  is 
that  it  enables  him  to  pay  his  own  compensation  costs  without 
contributing  anything  to  the  costs  of  others,  and  also  to  get  the 
exclusive  benefit  of  any  reduction  in  his  own  compensation  costs 


32 


State  Insurance  Fund 


which  he  may  be  able  to  bring  about  through  better  safety  equip¬ 
ment  and  organization.  Similarly,  the  main  advantage  of  mutual 
insurance  for  a  number  of  employers  insured  on  this  basis  is  that 
it  gives  them  the  opportunity  to  share  their  compensation  costs 
collectively  without  taking  chances  in  a  common  insurance  pool, 
and,  further,  to  obtain  the  collective  benefit  of  any  savings  which 
they  may  be  able  to  effect  through  co-operative  measures  of  acci¬ 
dent  prevention.  The  individual  group  plan  in  the  State  Fund 
offers  to  a  large  employer  the  principal  advantage  which  he  sees 
in  self-insurance,  and,  besides  this,  gives  him  at  a  comparatively 
low  additional  cost,  real  insurance  protection  and  complete  release 
from  his  liability  under  the  Workmen’s  Compensation  Law.  In 
the  same  way,  the  trade  group  plan  in  the  State  Fund  provides 
for  a  body  of  employers  in  the  same  trade  the  essential  advantages 
of  mutual  insurance  without  its  great  drawback  in  the  form  of 
an  assessment  liability.  The  State  Fund  has  been  able  to  com¬ 
pete  effectively  with  mutual  and  self-insurance  through  its  group¬ 
ing  system.  If  all  risks  in  the  State  Fund  were  merged  in  the 
general  groups,  it  would  be  extremely  difficult  to  maintain  effective 
competition  with  mutual  and  self-insurance. 

While  the  special  group  plan  is  highly  advantageous  for 
employers  so  grouped,  it  is  also  advantageous  for  the  State  Fund, 
as  a  whole,  and  for  employers  in  the  general  groups.  It  is  desir¬ 
able  in  the  interest  of  security  and  economy  of  State  Fund 
insurance  that  large  employers  and  good  risks  be  attracted  into 
the  State  Fund.  Under  the  competitive  conditions  prevailing 
in  this  State  the  requisite  attraction  can  be  supplied,  as  has  been 
pointed  out,  only  through  the  special  group  plan.  The  volume 
of  business  that  has  been  attracted  on  this  basis  benefits  the  State 
Fund  and  its  policyholders,  in  general,  in  the  following  ways: 
The  large  premium  accounts  in  the  special  groups  make  heavy 
contributions  to  the  catastrophe  surplus,  which  serves  for  the 
protection  of  all  policyholders.  Hot  only  do  the  special  groups 
contribute  largely  to  the  expenses  in  a  direct  way,  but  they  help 
indirectly  to  lower  the  cost  of  insurance  to  every  employer  in  the 
general  groups,  by  giving  the  State  Fund  a  much  lower  expense 
ratio  than  could  otherwise  be  attained.  The  extremely  low 
expense  ratio  of  7%  per  cent  for  1918,  was  made  possible  only 
by  the  presence  of  the  special  groups.  A  favorable  experience  in 


Answer  to  Report  of  Jeremiah  F.  Connor 


33 


the  special  groups,  as  a  whole,  tends  to  lower  the  loss  ratio  of 
the  State  Fund  and  thus  to  keep  the  cost  of  insurance  on  a  lower 
basis  than  would  otherwise  be  possible,  for  in  the  long  run  a 
higher  loss  ratio  would  necessitate  higher  rates.  The  special 
group  plan  thus  helps  to  make  the  State  Fund  a  safer  and  cheaper 
carrier  of  insurance  for  employers  at  large. 

Legality  of  Plan 

With  respect  to  the  legality  of  the  special  group  plan,  the 
authority  to  establish  and  maintain  special  groups  is  clearly  con¬ 
ferred  by  the  provisions  of  section  95  of  the  Workmen’s  Compen¬ 
sation  Law.  The  Commission  is  given  power  to  rearrange  any 
groups  as  originally  constituted  by  section  2  of  the  law,  “  by 
withdrawing  any  employment”  “  embraced  in  it  and  transferring 
it  wholly  or  in  part  to  any  other  group,  and  from  such  employ¬ 
ments  to  set  up  new  groups  at  its  discretion.”  This  language  is 
very  broad  and  sweeping.  The  use  of  the  words  “  in  part  ”  seems 
clearly  to  justify  the  creation  of  an  individual  group,  as  a  part 
of  an  employment  may  be  either  one  branch  of  the  industry  in 
question  or  one  employer  or  establishment.  The  opinion  of  the 
Attorney-General,  rendered  January  25,  1916,  recognizes  the 
legality  of  setting  up  a  single  employer  as  a  group  under  certain 
conditions  or  limitations.  The  right  of  the  Commission  to  set 
up  a  group  composed  of  a  number  of  employers  or  risks  would 
appear  to  be  even  clearer,  or  less  open  to  question,  than  the  right 
to  create  a  purely  individual  group. 

The  conditions  or  limitations  set  forth  in  the  opinion  of  the 
Attorney-General  are  defined  in  the  following  extracts  from  that 
opinion : 

“  The  only  way  in  which  a  single  employer  in  the  State 
Insurance  Fund  can  be  separately  grouped  by  the  State 
Industrial  Commission  for  rating  and  dividend  purposes, 
under  Sec.  95  of  the  Workmen’s  Compensation  Law,  is 
where  the  nature  of  his  business  and  the  degree  of  risk  of 
injury  is  such  that  he,  in  fact,  represents  a  group  by  him¬ 
self,  subject,  however,  to  the  opportunity  of  other  employers 
in  the  State  Fund  who  come  within  its  limitations  to  be  made 
members  of  that  group. 

2 


State  Insurance  Fund 


34 

“  The  law  thus  seems  to  permit  the  commission  to  create 
new  groups,  but  each  group  should  be  available  to  all 
employers  coming  within  its  limitations,  and  if  a  group  is 
divided  into  classes,  each  class  should  be  available  to  all 
employers  within  the  group,  who  come  within  the  limitations. 
To  make  a  group  or  class  by  himself,  the  commission  should 
be  able  to  point  to  the  peculiar  hazard  of  the  individual  risk 
which  justifies  its  separation  as  such.  If  the  commission 
can  justify  any  of  its  individual  groupings  upon  the  above 
basis,  I  can  see  no  objection  from  the  standpoint  of  its 
legality.” 

The  Attorney-General  thus  held  that  the  test  for  the  creation 
of  an  individual  group  is  to  be  found  in  the  nature  of  the  business 
and  the  degree  of  risk  of  injury,  which  must  be  such  as  to  con¬ 
stitute  a  peculiar  hazard  on  the  part  of  the  individual  risk,  so 
that  the  employer  in  question  represents  a  group  by  himself;  the 
Attorney-General  held,  further,  that  the  creation  of  an  individual 
group  must  be  subject  to  the  opportunity  of  other  employers  in 
the  State  Fund  who  come  within  its  limitations  to  be  made  mem¬ 
bers  of  the  group.  In  accordance  with  this  ruling,  it  would 
appear  that  the  Commission  is  justified  in  creating  special  groups, 
including  a  number  of  risks  as  well  as  individual  groups,  in  cases 
in  which  the  risks  in  question  are  differentiated  from  others  of 
a  similar  general  character  insured  in  the  State  Fund  by  reason 
of  special  conditions  inherent  in  the  nature  of  the  business  and 
the  degree  of  risk  of  injury.  The  latter  factor,  the  degree  of 
risk  of  injury,  it  should  be  noted,  is  necessarily  conditioned  by 
the  safety  organization  and  service  provided  by  the  employer. 

Importance  of  Special  Groups 

The  special  group  plan  is  the  very  foundation  and  framework 
of  the  State  Fund.  The  entire  structure  would  fall  apart  if  the 
special  group  plan  were  abolished  or  seriously  disturbed.  The 
importance  of  the  special  groups  may  be  appreciated  from  the  fact 
that  the  premiums  of  the  special  groups,  in  1918,  amounted  to 
$1,403,627.78,  out  of  total  premiums  for  the  State  Fund  of 
$3,282,965.24.  In  other  words,  approximately  45  per  cent  of 
the  total  business  of  the  State  Fund  is  carried  in  special  groups. 


Answer  to  .Report  op  Jeremiah  F.  Connor 


35 


The  total  volume  of  premiums  of  the  special  groups  from  the 
beginning,  July  1,  1914,  to  December  31,  1918,  amounted  to 
$3,841,148.13.  These  groups  contributed,  during  this  period  of 
four  and  one-half  years,  $253,644.35  to  the  expenses  and 
$211,689.24  to  the  catastrophe  surplus  of  the  State  Fund. 

Dividend  Credits  and  Deficits 

It  now  remains  to  comment  on  the  particular  criticisms  of  the 
special  groups  made  in  Mr.  Connor’s  report.  He  states,  concern¬ 
ing  the  dividend  credit  to  the  special  groups :  “  This  credit  is 

made  without  regard  to  the  condition  of  the  State  Fund  generally, 
whether  solvent  or  insolvent.  In  1916,  for  example,  dividends 
were  declared  in  the  special  groups,  although  the  losses  of  the 
State  Fund  exceeded  its  income.” 

This  statement  is  wholly  erroneous.  It  is  definitely  stipulated 
in  submitting  the  special  group  proposition  to  an  employer  and 
in  accepting  business  on  this  basis,  that  dividends  shall  be  credited 
only  in  case  the  State  Fund,  as  a  whole,  is  solvent.  As  the  State 
Fund  has  never  been  insolvent,  it  has  been  possible  from  the 
beginning  to  credit  dividends  in  special  groups  whenever  earned. 
It  is  true,  however,  that  the  losses  and  expenses  of  the  State  Fund 
for  1916  were  slightly  in  excess  of  the  earned  premiums.  This 
was  due  to  the  fact  that  in  the  general  groups,  as  a  whole,  and  in 
each  one  of  these  groups,  the  losses  exceeded  the  earned  premiums, 
and  that  at  the  end  of  the  year  every  one  of  the  general  groups 
showed  a  deficit  on  the  cumulative  experience  to  date.  As  the 
State  Fund  still  remained  solvent,  because  of  the  earnings  of  the 
special  groups,  it  was  possible  to  continue  to  credit  dividends  in 
special  groups  out  of  the  surplus  earned  by  such  groups. 

Again,  Mr.  Connor  states: 

“  If  the  losses  of  the  special  groups  exceeded  the  premium, 
and  they  have  in  several  cases,  these  losses  are  paid  from  the 
State  Fund  generally.  The  other  special  groups  are  not 
even  called  upon  to  help  make  up  such  deficiencies.” 

This  is  not  true.  In  a  few  cases  deficits  in  special  groups 
have  developed  in  particular  policy  periods,  but  in  such  cases  the 
deficits  have  been  absorbed  by  the  surplus  earned  in  succeeding 
policy  periods,  with  the  single  exception  of  one  individual  group, 


36 


State  Insurance  Fund 


made  up  of  a  large  contracting  concern.  With  this  single  excep¬ 
tion,  each  of  the  special  groups  shows  a  surplus  on  the  basis  of 
the  cumulative  experience  to  date.  It  is  likely,  moreover,  that 
the  deficit  in  the  one  group  mentioned  will  be  wiped  out  before 
the  contract  is  completed  and  the  account  closed.  In  no  case  has 
any  deficit  in  a  special  group  been  charged  against  the  State 
Fund,  as  a  whole,  or  against  the  general  groups.  The  deficit  in 
the  case  of  the  single  group  cited  was  due  to  an  explosion  which 
killed  four  persons  and  seriously  injured  four  others,  and  cost 
approximately  $30,000.  In  case  the  premium  earnings  of  this 
group  in  the  final  accounting  should  prove  insufficient  to  take  care 
of  the  deficit,  it  is  the  intention  of  the  manager  of  the  State  Fund 
to  recommend  that  the  amount  of  the  deficit  still  remaining  be 
charged  against  the  catastrophe  surplus  of  the  State  Fund.  This 
disposal  of  the  matter  would  be  entirely  proper,  as  the  accident 
which  caused  the  deficit  was  really  of  the  proportions  of  a  catas¬ 
trophe,  and,  therefore,  could  reasonably  be  made  a  charge  against 
the  catastrophe  surplus,  to  which  all  the  special  groups,  as  well  as 
the  general  groups,  contribute  proportionately  to  premium. 

Mr.  Connor  further  cites  the  following  illustration  of  alleged 
discrimination  in  favor  of  the  special  groups: 

“At  times  some  of  the  six  general  groups  showed  a  surplus 
and  others  showed  losses.  Instead  of  enjoying  a  dividend, 
the  groups  showing  a  surplus  were  charged  with  deficiencies 
in  other  general  groups,  whereas  the  special  groups  were 
charged  with  no  part  of  the  deficiencies,  but  some  of  them 
still  received  dividends.” 

No  such  discrimination  has  been  practiced.  It  is  true  that 
no  dividends  were  declared  in  the  general  groups  during  the  years 
1916  and  1917,  and  the  first  six  months  of  1918,  for  the  reason 
that  these  groups,  collectively  and  individually,  failed  to  earn  a 
sufficient  surplus  to  warrant  dividend  distribution.  No  one  of 
the  general  groups  earned  a  surplus  on  the  business  of  1917  and 
1918.  At  the  close  of  the  year  1916  the  cumulative  experience  to  1 
date  showed  a  deficit  in  each  of  the  general  groups.  At  the  close  | 
of  the  first  six  months  of  1918  four  of  the  general  groups  still 
showed  a  deficit  to  date,  and  while  two  of  the  groups  showed  a 
surplus,  the  amount  of  the  surplus  in  each  case  was  too  small 


Answer  to  Report  of  Jeremiah  F.  Connor 


37 


to  justify  any  dividend  distribution.  Meanwhile  the  special 
groups,  as  a  whole,  continued  to  earn  a  surplus  available  for 
dividend  purposes  throughout  this  period  of  two  and  one-half 
years,  and  dividends  were  credited  accordingly,  in  so  far  as  they 
were  earned.  It  should  be  observed  here  that  the  State  Fund 
keeps  a  continuous  cumulative  account  with  each  of  the  groups, 
general  and  special,  and  in  the  long  run  the  entire  surplus  earned 
by  each  group  will  be  returned  to  its  members  as  dividends,  in  the 
case  of  the  general  groups,  precisely  as  in  the  case  of  the  special 
groups.  Ho  part  of  the  funds  of  the  general  groups  has  been  used 
for  the  benefit  of  the  special  groups,  nor  will  it  be  so  used  in  the 
future.  The  surplus  of  the  general  groups  and  that  of  the  special 
groups  may  be  said  to  be  kept  in  entirely  separate  compartments, 
and  neither  is  called  upon  to  contribute  to  the  support  or  benefits 
of  the  other. 

Mr.  Connor  also  offers  this  criticism: 

“  The  State  Fund,  in  one  of  the  semi-annual  reports  to 
the  commission,  described  the  insurance  in  these  special 
groups  as  catastrophe  insurance,  something  which  was  never 
contemplated  by  the  law  itself.” 

The  individual  group  plan  has  been  characterized  by  the  man¬ 
ager  of  the  State  Fund  as  a  form  of  catastrophe  insurance  for 
large  employers  at  low  cost,  because  this  description  emphasized 
one  phase  of  the  plan  which  renders  it  especially  attractive  as 
an  alternative  to  self-insurance.  But.  as  a  matter  of  fact,  insur¬ 
ance  in  the  special  groups  is  no  different  from  insurance  in  the 
general  groups  in  respect  to  the  kind  and  scope  of  the  protection 
given  an  employer.  The  policy  of  the  State  Fund  gives  the 
employer  insured  in  a  general  group,  as  well  as  one  insured  in 
a  special  group,  complete  compensation  coverage,  including  unlim¬ 
ited  catastrophe  insurance. 

Mr.  Connor  declares  that  while  an  individual  group  may  be 
created,  under  certain  circumstances  as  outlined  in  an  opinion 
by  the  Attorney-General.  “  the  Attorney-General  has  never  passed 
upon  the  method  employed  for  the  declaration  of  dividends,” 
and,  further,  that  “the  'State  Industrial  Commission  itself  was 
not  familiar  with  this  method  until  after  this  investigation  was 
started.” 


38 


State  Insurance  Fund 


The  method  of  distributing  dividends  in  the  special  groups 
was  fully  explained  to  the  Attorney-General  in  conferences  held 
at  the  time  the  question  of  the  legality  of  the  individual  groups 
was  before  him,  and  in  memoranda  submitted  by  the  manager 
of  the  State  Fund.  The  matter  has  repeatedly  been  considered 
and  discussed  by  the  full  Commission  in  connection  with  recom¬ 
mendations  of  the  actuary  and  the  manager  of  the  State  Fund 
for  the  approval  of  dividend  credits  in  special  groups. 

Dividends  in  General  Groups 
Mr.  Connor  asserts: 

“  Under  the  present  method  of  doing  business  the  State 
Fund  endeavors  to  pay  all  the  dividends  possible  to  employers 
in  the  special  groups,  and  to  keep  as  much  as  possible  away 
from  the  employers  in  the  general  groups.” 

There  is  not  the  slightest  justification  for  this  assertion.  It 
has  already  been  pointed  out  that  for  the  period  of  two  and  one- 
half  years,  during  which  the  general  groups  received  no  dividends, 
not  one  of  these  groups  earned  any  surplus  out  of  which  a  divi¬ 
dend  could  be  declared.  When  the  payment  of  dividends  in  the 
general  groups  was  resumed  for  the  last  six  months’  policy  period 
of  1918,  it  was  at  first  decided  to  declare  a  uniform  dividend  of 
10  per  cent  for  all  the  six  general  groups.  The  first  statement  of 
the  experience  for  the  policy  term  ended  December  31,  1918,  as 
made  up  by  the  actuarial  division  of  the  State  Fund,  showed 
that  a  surplus  had  been  earned  in  each  group,  and  it  was  deemed 
.advisable  by  the  management  to  recommend  at  once  a  10  per  cent 
dividend  for  all  employers  in  the  general  groups,  and  to  notify 
policyholders  of  the  dividend  declaration  at  the  earliest  possible 
date.  It  was  known  that  the  rates  of  dividend  earnings  had 
varied  somewhat  between  the  six  general  groups,  but  it  would 
have  required  a  considerable  investigation  to  determine  what  the 
different  rates  were  so  that  they  could  be  properly  recognized  in 
the  declaration  of  dividends.  Moreover,  the  uncertainty  with 
respect  to  the  future  of  business  conditions  after  the  war  indicated 
the  wisdom  of  conservative  action  in  distributing  surplus  earn¬ 
ings  of  1918.  These  conditions  led  the  manager  of  the  State 


Answer  to  Report  of  Jeremiah  F.  Connor 


39 


Fund  to  recommend  to  the  Commission  and  the  Commission  to 
approve  a  conservative  dividend  of  10  per  cent  in  all  six  general 
groups. 

Later  analysis  of  the  experience  of  the  several  groups  disclosed 
that  there  was  an  available  surplus  in  some  of  them  which  would 
justify  a  larger  dividend  than  the  10  per  cent  previously  declared, 
and  a  due  regard  for  the  equitable  treatment  of  the  different 
groups  appeared  to  call  for  a  further  distribution  of  dividends  to 
the  groups  showing  a  considerable  surplus  remaining  after  the 
first  dividend  credit  of  10  per  cent.  It  was  evident  that  such 
further  dividend  distribution  would  not  in  any  way  adversely 
affect  the  financial  standing  of  the  State  Fund.  Moreover,  later 
developments  in  the  business  world  seemed  to  guarantee  a  con¬ 
tinuance  of  industrial  activity  and  prosperity  for  the  immediate 
future.  Accordingly,  the  management  of  the  State  Fund  recom¬ 
mended  to  the  Commission  that  supplementary  dividends  he 
declared,  and  such  dividends  were  duly  approved  by  the  Com¬ 
mission.  These  additional  dividends  amount  to  20  per  cent  in 
the  first  group,  known  as  the  light  manufacturing  group;  10  per 
cent  in  the  second  group,  known  as  the  heavy  manufacturing 
group,  and  25  per  cent  in  the  fifth  group,  known  as  the  excavation 
and  tunnelling  group.  It  is  probable  that  a  further  distribution 
of  special  dividends  will  be  made  in  some  of  the  general  groups 
in  the  next  dividend  declaration,  after  the  close  of  the  current 
policy  period. 

In  short,  the  first  declaration  of  a  10  per  cent  dividend  for  all 
six  general  groups,  which  was  made  in  February  of  this  year, 
was  provisional  and  tentative,  and  in  later  dividend  distributions 
each  of  these  general  groups  will  receive  the  full  amount  of  the 
surplus  earned,  less  a  small  amount,  not  in  excess  of  10  per  cent 
of  the  semi-annual  premium,  which  will  be  held  temporarily  as 
a  margin  for  safety.  It  should  be  borne  in  mind  that  prior  to 
the  last  policy  period  of  1918,  not  one  of  these  groups  earned  a 
sufficient  surplus  to  warrant  a  dividend  for  the  two  and  one-half 
years  preceding.  The  State  Fund  was  not  withholding  dividends 
from  the  general  groups,  but  these  groups  were  not  earning  divi¬ 
dends.  Now  that  they  are  earning  dividends,  precisely  the  same 
method  of  dividend  distribution  will  be  followed  in  the  case  of 


40 


State  Insurance  Fund 


the  general  groups  as  in  the  case  of  the  special  groups.  This 
policy  with  respect  to  dividend  is  embodied  in  the  following 
resolutions  of  the  Commission,  adopted  June  4,  1919: 

“  Resolved ,  That  dividends  for  the  last  completed  policy 
period  in  any  group  shall  be  credited  out  of  surplus  earned 
in  such  group  and  period,  when  approved  by  the  Commission, 
after  deducting  from  the  earned  premiums,  losses  (including 
reserves  computed  as  nearly  as  may  be  on  a  uniform  basis 
for  all  groups)  expenses  and  catastrophe  charges,  less  any 
deficit  arising  out  of  previous  periods,  and  shall  be  such 
percentages  of  the  premium  as  may  be  agreed  upon  by  the 
Manager  and  Actuary,  of  the  State  Fund,  subject  to  the  tem¬ 
porary  retention  for  future  distribution,  of  not  less  than  5% 
nor  more  than  10%  of  the  semi-annual  premium,  provided 
that  the  total  surplus  remaining  to  the  credit  of  the  group 
shall  in  no  case  he  reduced  below  $2500.  Further,  when¬ 
ever  in  the  making  up  of  the  accounts  there  shall  be  found 
surplus  accumulated  from  periods  other  than  the  last  com¬ 
pleted  policy  period  amounting  to  $10,000  (or  such  less  sum 
as  in  the  judgment  of  the  Manager  and  Actuary  constitute 
a  safe  margin  for  contingencies)  additional  dividends,  when 
approved  by  the  Commission,  may  be  credited  in  respect 
to  such  earlier  periods,  provided,  that  such  additional  divi¬ 
dend  shall  not  reduce  the  balance  retained  as  a  margin  of 
safety,  including  the  balance  retained  from  the  surplus  of 
the  last  completed  policy  period  below  $2500.  After  any 
group  has  been  discontinued  more  than  two  full  years,  if 
in  the  judgment  of  the  Manager  and  Actuary  conditions 
warrant  it,  a  final  accounting  may  be  made  and  in  such  final 
accounting  the  margin  above  provided  for  need  not  be 
retained. 

“Further  resolved ,  That  it  is  hereby  declared  to  be  the 
policy  of  the  Commission  that  in  the  future  the  same 
methods,  as  far  as  practicable,  shall  be  adopted  for  all  groups, 
general  and  special,  with  respect  to  the  computation  and  dis¬ 
tribution  of  dividends  and  the  maintenance  of  reserves.” 


Answer  to  Report  of  Jeremiah  F.  Connor 


41 


Assets  mid  Reserves 

Mr.  Connor  declares: 

“  The  State  Fund  has  so  much  money  on  hand  that  it  has 
omitted  as  an  asset  the  item  for  audit  additions  and  has  set 
up  a  new  liability  for  experience  fluctuations  amounting  to 
$200,000,  and  carries  an  unassigned  surplus  of  $279,928.18.” 

It  was  deemed  advisable  to  omit  the  item  for  audit  additions 
from  the  assets,  as  this  amount  is  variable  and  somewhat  uncer¬ 
tain.  The  private  companies,  moreover,  are  not  permitted  to 
include  this  item  as  an  asset  in  their  reports  to  the  State  Super¬ 
intendent  of  Insurance.  There  is  now  no  good  reason  why  the 
State  Fund,  in  its  reports  to  the  same  Insurance  Department, 
should  not  conform  with  the  usual  requirement  in  this  respect. 

With  reference  to  the  reserve  for  experience  fluctuation,  which 
Mr.  Connor  terms  unnecessary,  it  should  be  explained  that  this 
reserve  was  set  up  for  the  first  time  in  the  financial  statement 
of  December  31,  1918.  As  the  designation  of  the  reserve  implies, 
it  was  intended  to  serve  as  a  buffer  against  unforeseen  fluctua¬ 
tions  of  experience.  The  year  1918  had  been  a  phenominally 
good  year  in  compensation  insurance.  The  loss  ratio  of  the  State 
Fund  was  only  50.5  per  cent  for  1918,  as  contrasted  with  91.4 
per  cent  for  1917.  The  improvement  was  due  mainly  to  substan¬ 
tial  additions  to  the  premium  receipts  resulting  from  larger  pay¬ 
rolls  produced  by  wartime  wages,  and  the  reduction  in  the  number 
and  severity  of  industrial  accidents  by  reason  of  more  settled 
business  conditions  in  1918,  as  compared  with  the  preceding  year. 
When  the  management  of  the  State  Fund  made  the  first  survey  of 
the  experience  of  1918  and  took  an  appraisal  of  the  prospects 
for  the  year  1919  at  the  time  the  annual  statement  was  in  prepara¬ 
tion,  it  seemed  most  unlikely  that  the  extremely  favorable  experi¬ 
ence  of  the  recent  past  could  be  expected  to  continue  for  the 
immediate  future.  Indeed,  the  confusion  attendant  upon  busi¬ 
ness  readjustments,  in  a  transition  from  a  war  to  a  peace  basis, 
pointed  to  the  probability  of  a  rise  in  the  accident  rate,  while 
at  the  same  time  it  was  naturally  to  be  expected  that  the  increase 
in  the  premium  income  for  1918,  due  to  the  abnormally  high 
wage  scale  then  prevailing,  would  show  some  falling  off  in  the 
next  year.  In  order  to  guard  against  such  contingencies,  it 


42 


State  Insurance  Fund 


seemed  wise  to  set  aside  from  the  surplus  earnings  of  1918  a 
special  reserve  of  $200,000,  for  experience  fluctuation.  The  par¬ 
ticular  object  in  setting  up  this  reserve  was  to  insure  the  payment 
of  dividends  in  the  general  groups  for  future  policy  periods.  The 
payment  of  dividends  in  these  groups  had  been  resumed  for  the 
last  policy  period  of  1918,  after  an  interruption  of  two  and  one- 
half  years.  It  seemed  advisable  to  take  measures  to  guard  against 
a  suspension  of  dividend  payments  in  the  general  groups  if  the 
experience  of  1919  should  develop  unfavorably.  It  was  thus 
intended  that  the  reserve  for  experience  fluctuation  should  be  used, 
if  at  all,  for  the  payment  of  dividends  in  general  groups,  in  case 
the  experience  in  some  succeeding  policy  period  should  not  be 
sufficiently  favorable  to  yield  a  surplus  available  for  dividends. 

With  respect  to  the  unassigned  surplus  of  $279,928.18,  which 
Mr.  Connor  also  characterizes  as  unnecessary,  it  has  already  been 
explained  that  the  situation  at  the  time  the  financial  statement 
was  prepared  and  the  10  per  cent  dividend  declaration  in  the 
general  groups  was  recommended,  was  such  as  to  call  for  a  policy 
of  cautious  conservatism  with  reference  to  dividends  and  reserves, 
and  it  was  not  to  be  forgotten  that  the  surplus  of  the  State  Fund 
has  been  seriously  depleted  by  the  unfortunate  experience  of  1916 
and  1917  common  to  all  compensation  insurance  carriers.  Under 
the  circumstances  the  management  of  the  State  Fund  would  have 
shown  itself  utterly  lacking  in  prudent  foresight  if  the  surplus, 
just  replenished  by  the  gain  of  1918,  which  might  be  termed  a 
windfall,  had  been  distributed  at  once  in  dividends.  Since  the 
first  provisional  distribution  of  dividends  in  the  general  groups 
on  the  10  per  cent  basis,  the  business  outlook  has  cleared  to  such 
an  extent  as  to  warrant  a  declaration  of  additional  dividends  in 
the  general  groups  from  the  unassigned  surplus,  as  previously 
stated.  A  further  declaration  of  special  dividends  out  of  this 
surplus  is  contemplated  in  connection  with  the  semi-annual  dis¬ 
tribution  of  dividends  at  the  close  of  the  current  policy  period, 
June  30,  1919. 

Mr.  Connor  also  characterizes  as  unnecessary  the  reserve  for 
deferred  claim  expenses  of  $266,011.49  and  the  reserve  for  securi¬ 
ties  fluctuation  of  $124,454.58.  The  reserve  for  deferred  claim 
expenses  is  set  up  to  provide  for  the  expense  of  paying  compensa¬ 
tion  on  outstanding  claims  that  run  beyond  the  period  of  the  year 


Answer  to  Report  of  Jeremiah  F.  Connor 


43 


during  which  the  accident  occurred.  That  is,  in  addition  to  the 
loss  reserve  covering  the  amount  of  each  claim,  an  expense  reserve 
for  the  cost  of  distributing  compensation  until  the  maturity  of 
the  claim  is  maintained  by  the  State  Fund.  This  deferred  claim 
expense  reserve  is  computed  on  the  basis  of  4  per  cent  of  the  loss 
reserve.  The  State  Insurance  Department  requires  the  mutual 
companies  to  maintain  a  reserve  for  deferred  claim  expenses  and, 
as  the  department  also  has  supervision  of  the  reserves  of  the 
State  Fund,  the  necessity  of  the  reserve  in  question  is  obvious. 
Further  discussion  of  this  reserve  and  others  maintained  by  the 
State  Fund  will  be  found  in  a  memorandum  of  the  actuary 
appended  to  this  report. 

The  reserve  for  securities  fluctuation  is  necessitated  by  the  fact 
that  the  State  Fund  must  report  its  investments  to  the  State 
Insurance  Department  on  the  basis  of  market  valuations.  This 
reserve  represents  the  difference  between  the  book  value  of  the 
investments  and  the  market  value  at  the  date  of  the  financial 
statement.  It  was  first  set  up  in  the  financial  statement  of 
June  30,  1918.  At  that  time  the  valuation  of  the  securities  of 
the  State  Fund,  according  to  the  market  quotations  as  required 
by  the  State  Insurance  Department,  showed  a  nominal  deprecia¬ 
tion  of  $121,183.15,  and  a  reserve  of  that  amount  was  accordingly 
set  up  for  investment  depreciation.  While  there  is  no  likelihood 
that  the  State  Fund  will  be  called  upon  to  liquidate  any  part  of 
its  investments,  nevertheless  by  reason  of  the  requirements  of 
the  State  Insurance  Department  and  the  practice  of  competing 
casualty  companies,  it  seems  desirable  and  proper  that  the  State 
Fund  should  at  all  times  be  able  to  show  a  satisfactory  financial 
condition  upon  a  market  value  basis.  In  order  to  make  this  pos¬ 
sible  a  sum  equal  to  the  excess  of  the  book  value  of  the  invest¬ 
ments  over  the  market  value  was  set  up  as  an  item  in  the  liabil¬ 
ities  of  the  State  Fund  in  the  financial  statement  of  June  30, 
1918.  This  reserve  was  again  included  in  the  liabilities  as  of 
December  31,  1918,  and  the  amount  was  increased  slightly,  to 
$124,454.58. 

Supervision  and  Competition 

The  fact  that  the  reserves  of  the  State  Fund  are  subject  to 
supervision  by  the  State  Superintendent  of  Insurance  is  of  great 
importance  in  its  bearing  on  the  policy  that  should  be  adopted 


44 


State  Insurance  Fund 


by  the  State  Fund  with  reference  to  reserves.  Another  con¬ 
sideration  that  carries  great  weight  in  this  case  is  the  fact  that 
the  State  Fund  has  no  monopoly,  but,  on  the  contrary,  is  in  active 
competition  with  the  private  casualty  companies.  It  is  obvious 
that  the  reserves  of  the  State  Fund  must  be  ’maintained  in  ac¬ 
cordance  with  the  rules  and  requirements  of  the  State  Insurance 
Department,  and,  furthermore,  that  the  reserves  must  be  so  clearly 
adequate  that  the  financial  statement  issued  by  the  State  Fund 
cannot  be  fairly  criticized  by  its  competitors,  as  indicating  any¬ 
thing  less  than  an  absolutely  sound  condition.  These  conditions 
were  called  to  the  attention  of  Mr.  Connor  in  communications 
from  the  manager  of  the  State  Fund,  under  date  of  February  28 
and  March  29,  1919,  as  follows: 

“In  this  connection,  let  me  call  particular  attention  to 
the  fact  that  the  reserves  of  the  State  Fund  are  subject  to 
the  supervision  of  the  State  Insurance  Department.  The 
Workmen’s  Compensation  Law,  in  section  92,  provides  that 
the  reserves  for  losses  ‘  shall  be  computed  in  accordance  with 
such  rules  as  shall  be  approved  by  the  superintendent  of 
insurance’  (section  92)  and  authorizes  the  Superintendent 
of  Insurance  to  examine  into  the  condition  of  the  State 
Fund  at  any  time  ‘for  the  purpose  of  determining  the  con¬ 
dition  of  the  investments  and  the  adequacy  of  the  reserves 
of  such  fund’  (section  106).  The  fact  that  the  reserves 
of  the  State  Fund  are  thus  subject  to  supervision  and  ex¬ 
amination  by  the  State  Insurance  Department  is  of  much 
importance  in  its  bearing  on  the  question  of  the  policy  that 
should  be  followed  by  the  State  Fund  in  setting  up  its  re¬ 
serves.  The  reserves  for  losses  must  be  set  up  in  accordance 
with  rules  approved  by  the  State  Insurance  Department. 

It  is  obvious  that  the  other  reserves  should  be  set  up  accord¬ 
ing  to  the  requirements  laid  down  by  the  State  Insurance 
Department  for  the  private  insurance  companies.  The  State 
Fund  cannot  afford  to  take  any  chance  that  the  State  Insur¬ 
ance  Department,  after  examination,  may  pronounce  its  re-  jj 
serves  to  be  inadequate  in  any  particular.  You  are  doubtless 
aware  that  prior  to  the  first  examination  of  the  State  Fund 
by  the  State  Insurance  Department,  as  of  June  30,  1916, 


Answer  to  Report  of  Jeremiah  F.  Connor 


45 


insinuations  were  made  freely  by  the  representatives  of  the 
casualty  companies  that  the  State  Fund  was  not  maintain¬ 
ing  adequate  reserves.  The  report  of  the  examination, 
which  stated  that  the  reserves  were  adequate,  greatly 
strengthened  the  competitive  position  of  the  State  Fund. 
If  any  time  in  the  future  an  examination  hy  the  State  In¬ 
surance  Department  should  disclose  any  deficiency  in  the 
reserves  of  the  State  Fund,  as  tested  by  the  rules  of  that 
department,  ihe  report  of  such  findings  would  he  exploited 
to  the  serious  detriment  of  the  State  Fund.  It  is  obvious 
that,  under  these  conditions,  an  extremely  conservative  policy 
is  the  only  one  that  is  safe  or  prudent  for  the  State  Fund. 

“  It  occurs  to  me  to  offer  a  further  comment  on  the  matter 
of  the  policy  that  should  he  adopted  hy  a  competitive  State 
Fund  with  reference  to  reserves.  The  matter  of  maintain¬ 
ing  adequate  reserves  at  all  times  is  vastly  more  important 
for  a  competitive  than  for  a  monopolistic  State  Fund.  If  a 
monopolistic  State  Fund  incurs  a  deficit  in  any  policy  period 
it  can  meet  the  situation  hy  advancing  rates;  a  competitive 
State  Fund  could  not  take  this  means  of  relief,  for  the  in¬ 
crease  of  rates  would  result  in  a  loss  of  business  that  would 
defeat  the  object  of  the  rate  advance.  In  fact,  the  very 
existence  of  a  deficit  in  itself  would  drive  business  away  from 
a  competitive  State  Fund.  The  way  in  which  a  monopolistic 
State  Fund  is  able  to  wipe  out  a  deficit  of  large  proportion 
by  manipulating  rates,  in  the  absence  of  competition,  is  well 
illustrated  by  the  history  of  the  West  Virginia  State  Fund. 
This  State  Fund  incurred  a  heavy  deficit  in  the  first  two 
years,  chiefly  on  account  of  two  catastrophes  in  the  coal  mine 
industry,  costing  approximately  $500,000.  The  deficit  on 
June  30,  1914,  amounted  to  $300,299.60,  and  on  June  30, 
1915,  it  had  increased  to  $621,938.99.  Within  three  years 
this  heavy  deficit  was  wiped  out,  and  on  June  30,  1918,  the 
Fund  showed  a  surplus  of  $165,649.95.  This  result  was 
accomplished  by  advancing  rates,  on  an  average  about  60 
per  cent  in  1916,  and  maintaining  the  rates  at  a  high  level 
in  1917  and  1918,  notwithstanding  the  low  loss  cost.  It 
would  have  been  utterly  impossible  for  the  West  Virginia 


46 


State  Insurance  Fund 


State  Fund  to  accomplish  this  remarkable  transformation 
if  it  had  been  subject  to  competition.  No  competitive  State 
Fund  could  rehabiliate  itself  after  the  fashion  of  the  West 
Virginia  State  Fund.  It  is  a  vital  matter  for  any  com¬ 
petitive  State  Fund  to  maintain  ample  reserves  and  surplus, 
and  in  this  way  to  protect  itself  against  the  possibility  of  a 
deficit,  for  such  a  fund  could  not  extricate  itself  from  a  state 
of  temporary  insolvency  by  advancing  rates.” 

• 

Method  of  Charging  Reserves 

Mr.  Connor  not  only  criticizes  these  reserves  as  unnecessary, 
but  he  also  contends  that  the  special  groups  have  not  been  charged 
for  their  proper  share  in  these  reserves.  The  State  Fund,  he 
declares,  “  carries  as  liabilities  the  following  reserves,  all  of  which 


are  unnecessary: 

Reserve  for  deferred  claim  expenses .  $266,011  49 

Reserve  for  experience  fluctuation .  200,000  00 

Reserve  for  securities  fluctuation  .  124,454  58 

Which  together  with  the  unassigned  surplus.  .  279,928  18 


Totals  .  $870,394  25 


u  No  part  of  the  above  with  the  possible  exception  of  a  small 
portion  of  the  unassigned  surplus  is  charged  against  the  special 
groups.” 

This  statement  is  partly  erroneous  and  wholly  misleading. 
The  intimation  is  that  the  State  Fund  practices  discrimination 
in  favor  of  the  special  groups  by  charging  practically  all  these 
reserves  against  the  general  groups,  thus  increasing  the  dividends 
of  the  former  and  diminishing  those  of  the  latter.  This  criticism 
is  wholly  unfounded.  In  accounting  and  distributing  of  divi¬ 
dends  to  the  special  groups,  the  State  Fund  charges  against  these 
groups  the  full  proportion  of  all  reserves  properly  and  equitably 
chargeable  against  these  accounts.  The  special  groups  from  the 
beginning  have  contributed  their  full  share  to  the  expenses  of  the 
State  Fund,  including  not  only  the  current  expenses,  but  also  the 
deferred  claim  expenses,  and  the  amount  of  the  Commission’s 


Answer  to  Report  of  Jeremiah  F.  Connor 


47 


expenses  apportioned  to  the  State  Fund  in  the  distribution  of 
these  expenses  among  the  various  insurance  carriers.  The  reserve 
for  experience  fluctuation  is  not  a  proper  charge  against  the 
special  groups.  As  has  been  pointed  out,  the  particular  object 
of  this  reserve  was  to  enable  the  State  Fund  to  continue  the  pay¬ 
ment  of  dividends  in  the  general  groups,  even  in  spite  of  an  un¬ 
favorable  experience  in  some  future  policy  period.  There  was 
no  intention  of  using  any  part  of  this  reserve  for  the  payment 
of  dividends  in  the  special  groups.  This  reserve  was  set  up 
solely  for  the  benefit  and  protection  of  the  general  groups,  and 
no  part  of  it,  therefore,  should  be  charged  against  the  special 
groups. 

Furthermore,  the  occasion  for  creating  this  reserve,  as  has 
been  set  forth,  was  the  uncertainty  as  to  the  business  outlook  at 
the  time  the  financial  statement  for  December  31,  1918,  was  pre¬ 
pared.  In  view  of  the  assured  prospect  of  continued  industrial 
activity  and  prosperity  which  the  developments  of  recent  months 
have  brought,  the  need  of  maintaining  this  reserve  may  be  said 
to  have  passed,  and  it  is  the  intention  of  the  management  of  the 
State  Fund  to  recommend  that  it  be  eliminated  in  the  next 
financial  statement  as  of  June  30,  1919. 

In  the  case  of  the  reserve  for  securities  fluctuation  or  invest¬ 
ment  depreciation,  it  should  be  pointed  out  that  depreciation  is 
properly  a  charge  against  interest.  This  reserve,  therefore,  should 
be  charged  against  the  interest  earnings  of  the  State  Fund.  No 
part  of  the  interest  earnings  as  yet  has  been  credited  to  the  special 
groups,  and  there  is  no  reason  why  any  part  of  the  investment 
depreciation  reserve  should  be  charged  against  these  groups.  The 
interest  earnings  of  the  State  Fund  exceed  the  amount  of  this 
reserve  by  over  $100,000. 

Finally,  as  to  the  unassigned  surplus,  it  is  sufficient  to  state 
that  this  is  made  up  of  contributions  in  the  form  of  surplus  earn¬ 
ings  from  all  the  groups,  general  and  special. 

In  brief,  the  only  one  of  the  reserves  named  by  Mr.  Connor 
which  has  been  charged  wholly  against  the  general  groups  is  the 
temporary  reserve  for  experience  fluctuation,  and  this  reserve  is 
not  properly  chargeable  in  any  part  against  the  special  groups 
for  the  reserve  stated. 


48 


State  Insurance  Fund 


Attitude  Toward  Claimants 

Mr.  Connor  further  criticizes  the  special  groups  as  furnishing 
a  motive  for  employers  so  grouped  to  keep  down  the  payment 
of  compensation.  He  states: 

“  Some  employers  in  the  special  groups  treat  the  claimants 
with  absolute  fairness.  Others  are  more  interested  in  keep¬ 
ing  down  the  payment  of  compensation  because  the  amount 
saved  is  returned  to  them  in  the  form  of  dividends.  Such 
employers  are  sometimes  represented  by  claim  agents  before 
the  Commission  and  as  to  these  the  result  in  special  groups 
is  probably  as  bad  as  under  direct  settlement.  A  case  in 
point  is  as  follows: 

“  Hick  Schemelia  (Case  Ho,  B-4500)  was  injured  Janu¬ 
ary  20,  1918.  He  was  paid  under  an  award  from  the  State 
Insurance  Fund  the  sum  of  $125  up  to  the  time  he  resumed 
work.  The  injury  resulted  in  a  permanent  deformity  of 
one  arm.  The  case  was  closed  March  28,  1918.  About  a 
year  later  he  obtained  a  rehearing  through  an  attorney  and 
was  awarded  compensation  for  partial  loss  of  use  of  the  arm 
in  the  sum  of  $2,215  in  addition  to  the  amount  he  had  already 
received.” 

As  respects  the  general  criticism  that  employers  in  the  special 
groups  have  a  particular  interest  in  keeping  down  the  payment 
of  compensation,  it  is  to  be  observed  that  this  motive  is 
present  in  even  greater  degree  in  the  case  of  a  self-insured  em¬ 
ployer.  The  same  incentive  exists,  but  in  a  less  degree,  in  the 
case  of  employers  insured  in  mutual  associations.  The  employer 
is  one  of  the  parties  in  interest  and  has  a  right  to  be  represented 
at  hearings  before  the  Commission.  Such  representation  does 
not  enable  the  employer  to  control  the  procedure  and  dictate  the 
award.  It  devolves  upon  the  commissioner  or  deputy  in  charge 
to  dominate  the  situation  and  to  dispense  even  justice  in  the  face 
of  pressure  from  conflicting  interests.  In  fact,  this  is  a  general 
administrative  question  and  not  one  specifically  touching  the  State 
Fund. 

With  reference  to  the  particular  case  cited  by  Mr.  Connor,  it 
appears  that  this  case  was  duly  closed  by  the  Commission  in  the 
•usual  manner  after  award  had  been  made  for  the  duration  of  the 


Answer  to  Report  of  Jeremiah  F.  Connor 


40 


disability  up  to  the  time  the  employee  returned  to  work.  The 
employer  made  no  attempt  to  block  the  award,  and  neither  the 
employer  nor  the  State  Fund  was  represented  at  the  hearing. 
Later  a  permanent  partial  disability  developed  in  consequence 
of  the  injury.  The  case  was  then  reopened  and  an  additional 
award  was  made  for  partial  loss  of  the  use  of  the  arm.  It  was 
not  necessary  for  the  claimant  to  place  the  case  in  the  hands  of 
an  attorney  in  order  to  secure  the  reopening  of  the  case  and  the 
award  to  which  he  had  become  entitled  by  reason  of  the  subse¬ 
quent  permanent  disability. 

Windoiv  Cleaners'  Croup 

Mr.  Connor  closes  his  discussion  of  the  special  groups  with 
some  comments  on  the  group  for  employers  engaged  in  the  window 
cleaning  business.  These  comments  contain  several  inaccuracies, 
lie  refers  to  this  group  as  composed  of  “  employers  engaged  in 
the  window  cleaning  business  in  Hew  York  city.”  The  member¬ 
ship  of  the  group  is  not  confined  to  employers  in  Hew  York  city. 
It  includes  all  window  cleaning  contractors  in  the  State  who  are 
insured  in  the  State  Fund.  Further,  Mr.  Connor  says :  “  These 
employers  are  supposed  to  join  a  window  cleaners’  association 
and  are  then  permitted  to  obtain  insurance  in  the  State  Fund  in  a 
special  group.”  This  group  is  not  confined  to  members  of  any 
association;  employers  are  permitted  to  obtain  insurance  in  this 
group  without  regard  to  such  membership ;  in  fact,  the  group 
includes  a  considerable  number  of  employers  who  are  not  members 
of  any  association.  It  is  true  that  the  Window  Cleaners’  Pro¬ 
tective  Association  was  formed  for  the  purpose  of  improving 
conditions  in  the  trade  and  enabling  members  to  obtain  insurance 
on  better  terms.  The  association  co-operates  with  the  State  Fund 
in  matters  of  pay-roll  reporting  and  accident  prevention  to  the 
common  advantage  of  the  State  Fund  employers  and  employees. 

Mr.  Connor  continues: 

te  The  rate  established  for  this  insurance  is  $14.92  ner 
$100  of  payroll.  When  the  group  was  created,  it  was  under¬ 
stood  that  the  advance  premium  was  to  be  collected  on  the 
basis  of  $5  and  the  balance  should  be  paid  at  the  close  of  each 
six  months’  policy  term.” 


50 


State  Insurance  Fund 


This  was  not  the  understanding.  It  was,  however,  agreed  that 
the  State  Fund  would  accept  an  advance  installment  of  the 
premium  on  the  basis  of  five  dollars  in  recognition  of  the  deposit 
of  a  bond  for  $12,500  by  the  Windows  Cleaners’  Protective  Asso¬ 
ciation  to  secure  the  State  Fund  in  the  event  that  the  losses  and 
other  charges  against  the  group  exceeded  the  amount  of  the  install¬ 
ment  premiums,  and  it  was  further  stipulated  that  in  such  event 
the  State  Fund  could  call  upon  members  for  additional  install¬ 
ments  of  premiums,  and  in  the  case  of  their  failure  to  make  good 
the  deficit,  should  use  surety  bond  for  this  purpose.  It  is  of 
interest  to  state  that  the  cash  premium  paid  by  the  members  of 
this  group  for  the  six  months’  policy  term  amounted  to  $16,528.67, 
and  in  addition  to  this  amount  the  State  Fund  has  the  $12,500 
bond  deposited  by  the  association. 

Mr.  Connor  proceeds  : 

“  The  State  Fund  now  has  under  consideration  a  plan  to 
waive  the  collection  of  the  balance  of  the  premium  and  make 
an  adjustment  with  these  employers  on  the  basis  of  their 
actual  losses.  In  other  words,  because  the  experience  for 
six  months  has  been  favorable,  the  State  Fund  does  not 
intend  to  collect  the  additional  premiums  to  guard  against 
future  losses.  It  is  well  known  that  window  cleaning  is  one 
of  the  most  hazardous  employments  in  the  State.  Most  of 
the  accidents  result  in  death.  Carrying  such  insurance  upon 
the  basis  of  the  current  losses  for  six  months  is  about  the 
poorest  insurance  proposition  that  can  be  advanced.  In  the 
next  six  months  the  losses  might  be  fifty  times  the  premium 
and  the  practice  employed  by  the  State  in  respect  to  this 
group  of  employers  cannot  and  would  not  be  undertaken 
were  it  not  for  the  fact  that  the  general  groups  are  back 
of  the  special  groups  to  pay  the  bills  in  case  the  premium 
in  the  special  group  is  insufficient.” 

It  has  already  been  explained  that  the  arrangement  with  the 
Window  Cleaners  did  not  call  for  the  payment  of  the  entire  bal¬ 
ance  of  the  premiums  at  the  close  of  each  six  months'  policy 
period,  but  merely  for  the  payment  of  additional  amounts  as 
needed  to  cover  the  incurred  losses,  with  security  for  such  pay¬ 
ment  in  the  form  of  a  bond  deposited  by  the  association.  The 


Answer  to  Report  of  Jeremiah  F.  Connor 


51 


State  Fund,  therefore,  has  never  had  under  consideration  any 
plan  to  waive  the  collection  of  the  balance  of  the  premiums,  hut, 
on  the  contrary,  reserves  its  right  to  call  for  additional  premiums 
as  needed  to  cover  incurred  losses  and  other  charges.  Mr.  Con¬ 
nor’s  further  reflection  upon  the  unsoundness  of  this  plan  and 
the  danger  of  a  deficit  are,  therefore,  unwarranted.  In  particular 
his  remark  that  the  practice  with  respect  to  this  group  “  cannot 
and  would  not  be  undertaken,  were  it  not  for  the  fact  that  the 
general  groups  are  back  of  the  special  groups  to  pay  the  bills  in 
case  the  premium  in  the  special  groups  is  insufficient,”  is  a 
groundless  insinuation.  It  has  already  been  shown  clearly  that 
the  general  groups  are  not  supporting  the  special  groups  and  that 
the  former  will  never  he  called  upon  to  pay  any  deficit  for  the 
latter. 

Mr.  Connor  concludes  with  this  assertion: 

“  The  State  Fund  also  proposes  to  discriminate  as  to  divi¬ 
dends  between  the  employers  in  this  group  who  have  joined 
the  Window  Cleaners’  Association  and  those  who  have  not.” 

Ho  such  discrimination  is  practiced  or  contemplated,  and  divi¬ 
dends  in  this  group  will  be  distributed  equitably  among  the  mem¬ 
bers  on  the  basis  of  their  premiums. 

The  establishment  of  the  Window  Cleaners’  group  was  entirely 
justifiable  from  every  point  of  view.  Before  this  group  was  cre¬ 
ated,  the  rates  and  terms  of  insurance  for  this  trade  were  prac¬ 
tically  prohibitive.  Many  members  of  the  trade  were  unable  to 
provide  insurance,  and  their  employees  were  without  protection 
under  the  law.  An  appeal  was  made  to  the  Chairman  of  the 
Commission  by  the  employees’  union,  and  after  conferences  with 
the  committee  representing  the  employers,  the  plan  of  a  special 
group  was  formulated.  This  plan  brought  about  a  solution  of  a 
most  difficult  problem,  enabling  employers  in  this  hazardous  busi¬ 
ness  to  obtain  insurance  on  reasonable  terms,  protecting  the  State 
Fund  through  the  deposit  of  a  surety  bond,  in  addition  to  the 
cash  payments,  and  opening  the  way  to  an  effective  co-operation 
between  the  State  Fund  and  a  responsible  association  representing 
the  employers.  It  would  seem  that  this  arrangement  really  de¬ 
serves  commendation  rather  than  criticism. 


52 


State  Insurance  Fund 


The  WynJcoop  Service 

The  Wynkoop  Service  is  a  compensation  service  and  insurance 
brokerage  organization  which  has  placed  a  considerable  volume 
of  business  in  the  State  Fund.  The  service  includes  medical  and 
hospital  care  for  employees,  safety  engineering  and  accident  pre¬ 
vention  work,  supervision  of  claim  matters  and,  in  some  instances, 
general  efficiency  service  for  the  employer.  This  service  is  fur¬ 
nished  under  a  contract  providing  for  a  division  between  the 
employer  and  the  Wynkoop  Service  of  the  amount  of  any  saving 
in  the  cost  of  compensation  insurance  below  a  certain  maximum 
cost,  which  is  usually  the  amount  of  the  premium  according  to 
the  manual  or  schedule  rates  of  the  State  Fund  applicable  to  the 
risk. 

It  is  important  to  note  that  the  Wynkoop  Service  is  authorized 
by  its  contract  with  the  employer  to  represent  the  latter  in  all 
matters  relating  to  his  compensation  insurance.  Under  this  con¬ 
tract  Mr.  Wynkoop  is  the  duly  authorized  representative  of  the 
employer  in  all  dealings  with  the  State  Fund  or  any  other  com¬ 
pensation  insurance  carrier.  It  is  obvious  that  the  State  Fund 
could  not  fairly  or  reasonably  refuse  to  deal  with  an  agency  thus 
duly  authorized  to  represent  the  employer,  provided  that  the 
methods  of  such  agency  are  legal  and  proper.  Indeed,  the  co¬ 
operation  of  a  legitimate  and  reputable  service  organization  in 
bringing  business  into  the  State  Fund  and  supervising  risks  so 
insured  should  be  welcomed  and  facilitated,  as  a  valuable  factor 
in  the  upbuilding  of  the  State  Fund  both  with  respect  to  the  quan¬ 
tity  and  the  quality  of  its  business. 

Some  of  the  risks  supervised  by  the  Wynkoop  Service  are  placed 
in  one  of  the  special  groups,  Group  1 7,  Miscellaneous  Metalware 
Group;  others  are  subject  to  the  State  Fund  plan  of  experience 
rating ;  still  others  are  placed  in  the  general  groups. 

There  has  been  no  favoritism  or  discrimination  in  the  rating 
and  grouping  of  these  risks.  "No  arrangement  has  been  offered  in 
the  case  of  the  Wynkoop  Service  that  is  not  open  on  equal  terms 
to  any  other  broker  or  service  organization.  The  State  Fund  has 
treated  risks  under  contract  with  the  Wynkoop  Service  precisely 
as  it  treats  other  risks  placed  in  the  State  Fund  by  any  similar 
agency.  These  risks  have  been  put  into  a  special  group,  or  have 


Answer  to  Report  of  Jeremiah  F.  Connor 


53 


been  given  a  special  experience  rating,  or  have  been  placed  in  one 
of  the  general  groups,  in  accordance  with  the  particular  arrange¬ 
ment  properly  applicable  in  each  case  under  the  rules.  There  is 
nothing  unique  or  peculiar  in  the  treatment  of  the  risks  having 
the  Wynkoop  service. 

Miscellaneous  Metalware  Group 

The  Miscellaneous  Metalware  Group  is  not  the  only  one  of  its 
kind  in  the  State  Fund.  Another  group,  Group  15,  Machine 
Shop  and  Foundry  Group,  is  precisely  similar  to  Group  17  in  its 
composition  and  operation.  This  group  is  made  up  of  a  number 
of  large  employers  in  the  Buffalo  district,  who  have  combined  to 
provide  special  medical,  safety  and  claim  supervision  for  their 
plants.  Also  the  State  Fund  experience  rating  plan  has  been 
applied  to  numerous  risks  not  under  the  Wynkoop  Service.  Even 
the  special  group  for  employers  using  the  Wynkoop  Service  is  not 
closed  to  all  other  applicants ;  on  the  contrary,  this  group  is  open 
to  any  employer  in  the  same  trade  who  could  qualify  for  member¬ 
ship  by  complying  with  the  conditions  as  to  the  size  of  payroll, 
and  medical  and  safety  organization.  As  a  matter  of  fact,  there 
is  only  one  other  risk  in  the  State  Fund  that  could  qualify  for 
admission  to  this  group.  A  proposition  to  join  the  group  upon 
due  compliance  with  specified  conditions  for  membership  has  been 
offered  to  this  employer,  who  has  the  matter  under  consideration. 
The  statement  of  Mr.  Connor  that  Group  17  “  is  exclusively  for 
employers  having  the  Wynkoop  Service,”  and  that  •  “  no  other 
employer  in  the  State  Fund  or  in  any  other  industry  in  the  State 
carrying  on  a  similar  business  is  allowed  in  this  group,”  is  not 
in  accordance  with  the  facts. 

With  respect  to  the  legality  of  Group  17,  it  should  be  pointed 
out  that  employers  in  this  group  are  all  engaged  in  related 
branches  of  iron  and  steel  manufacture,  involving  a  similar  haz¬ 
ard  of  industry.  The  classifications  represented  in  the  group 
include  steel  foundries,  drop  forging,  bolt  and  nut  manufacture, 
tin  and  teme  plate  manufacture,  ornamental  brass,  bronze  and 
iron  work,  malleable  iron  work,  wire  cable  manufacture,  and  wire 
drawing.  Authority  to  establish  a  trade  group  of  this  character 
is  conveyed  by  the  provisions  of  section  95  of  the  Workmen’s  Com- 


54 


State  Insurance  Fund 


pensation  Law  empowering  the  commission  to  “  rearrange  any 
of  the  original  groups  in  the  law  by  withdrawing  any  employ¬ 
ments  embraced  in  it  and  transferring  it  wholly  or  in  part  to  any 
other  group,  and  from  such  employments  to  set  up  new  groups 
at  its  discretion.”  The  creation  of  special  trade  groups  is  also 
in  harmony  with  the  principles  and  conditions  laid  down  in  the 
opinion  of  the  Attorney-General  of  the  State  January  25,  1916, 
in  which  he  sustained  the  right  of  the  Commission  to  set  up  even 
a  single  employer  as  a  special  group,  provided  that  the  nature  of 
the  operations  and  the  hazard  of  the  business  were  such  as  to 
differentiate  the  risk  in  question  from  others  of  a  similar  general 
character  insured  in  the  State  Fund  in  such  a  way  as  to  justify 
separate  classification. 

With  respect  to  the  propriety  of  establishing  trade  groups, 
such  as  Group  17,  it  should  be  observed  that  this  arrangement  is 
justified  in  recognition  of  the  reduced  hazard  of  risks  having  the 
benefit  of  a  properly  organized  system  of  medical  and  safety 
supervision.  The  trade  group  plan  enables  a  body  of  employers 
who  are  sufficiently  progressive  to  provide  an  expert  medical  and 
safety  organization  for  their  plants,  to  obtain  the  benefit  of  the 
saving  effected  in  this  way,  and  not  to  share  it  with  other  em¬ 
ployers  who  may  be  indifferent  or  negligent  with  respect  to  safety 
matters.  The  arrangement  thus  brings  to  bear  a  direct  incentive 
to  prevent  accidents  and  to  reduce  insurance  costs,  to  the  mutual 
advantage  of  the  employer  and  the  insurance  carrier.  The  plan 
has  the  further  advantage  for  the  Insurance  Fund  that  it  enables 
it  to  secure  and  hold  desirable  business  that  under  the  keenly  com¬ 
petitive  conditions  in  this  State  would  tend  to  leave  the  State 
Fund  for  mutual  or  self-insurance. 

Special  Experience  Rating 

With  reference  to  the  State  Fund  experience  rating  plan,  which 
is  applied  to  some  risks  under  the  Wynkoop  Service,  as  well  as 
to  various  others  not  having  this  service,  it  should  he  stated  that 
this  plan  was  formulated  for  use  in  connection  with  large-size 
risks,  having  an  approved  safety  and  medical  organization,  and 
was  put  into  operation  at  the  time  when  the  experience  rating  plan 
of  the  Compensation  Inspection  Rating  Board  was  highly  unsatis- 


Answer  to  Report  oe  Jeremiah  F.  Connor 


factory,  that  plan  having  later  been  abolished.  The  application 
of  the  plan  is  limited  to  approved  risks  paying  a  premium  of  not 
less  than  $1,000  for  six  months.  The  plan  provides  for  a  read¬ 
justment  of  rates  at  the  end  of  each  policy  period.  The  method 
of  readjustment  is  described  in  a  memorandum  attached  to  this 
report. 

This  experience  rating  plan  is  actuarially  sound  and  is  a  justi¬ 
fiable  method  of  giving  recognition  to  the  reduced  hazard  of  a 
risk  in  consequence  of  a  proper  organization  of  medical  and 
safety  service.  The  plan  is  based  on  the  same  principles  and  is 
designed  to  accomplish  the  same  objects  as  the  special  group  plan. 
The  main  object  of  formulating  and  applying  the  experience  rat¬ 
ing  plan  was  to  enable  the  State  Fund  to  attract  and  hold  a 
desirable  class  of  risks,  to  which  the  special  group  plan  is  not 
applicable.  This  class  includes  large-size  risks,  having  a  safety  and 
medical  organization  and  showing  a  generally  good  loss  experi¬ 
ence,  which,  however,  cannot  be  assigned  to  special  groups  because 
of  the  inability  to  furnish  a  sufficient  volume  of  premium  to 
warrant  separate  grouping.  Employers  of  this  class  when  placed 
in  general  groups  become  dissatisfied  with  the  cost  of  their  insur¬ 
ance,  which  seems  to  them  unduly  high  as  measured  by  their  own 
favorable  experience,  and  it  becomes  increasingly  difficult,  as  time 
goes  on,  to  secure  a  renewal  of  such  business.  Such  employers, 
who  have  equipped  and  organized  their  plants  for  safety  work, 
and  have,  consequently,  developed  a  low  loss  ratio,  feel  that  they 
are  entitled  to  a  lower  rating  on  this  account,  and  are  not  satisfied 
with  the  terms  offered  by  the  State  Fund  to  employers  in  the 
general  groups.  The  experience  rating  plan  was  devised  to  meet 
the  requirements  of  such  high-class  large  risks. 

The  plan  was  applied  at  first  tentatively  and  cautiously.  It 
has  been  extended  gradually  as  new  risks  have  presented  them¬ 
selves  for  consideration,  through  notice  of  withdrawal,  which  leads 
sometimes  to  an  offer  of  this  plan,  as  it  means  the  holding  of 
employers  who  otherwise  would  leave  the  State  Fund;  through 
requests  by  field  representatives  of  the  State  Fund  for  permission 
to  offer  the  plan  to  an  employer  who  would  not  be  attracted  by 
the  proposition  to  insure  in  one  of  the  general  groups ;  and  through 
applications  on  behalf  of  risks  submitted  through  the  Wynkoop 


56 


State  Insurance  Fund 


Service  and  others.  It  should  be  noted  that  the  plan  has  been 
offered  to  a  considerable  number  of  employers  who  have  declined 
to  accept  it,  chiefly  because  of  the  liability  to  pay  an  additional 
premium  in  the  case  of  a  deficit.  It  would  not  be  possible,  for 
this  reason,  to  put  the  plan  into  operation  uniformly  for  all  em¬ 
ployers  having  the  requisite  amount  of  premium  and  meeting 
the  other  conditions.  In  order  that  there  may  be  no  basis,  how¬ 
ever,  for  any  charge  of  discrimination  or  unfairness  in  the  use  of 
the  plan,  it  has  been  decided  recently  by  the  Commission  that  the 
plan  be  offered  to  every  policyholder  having  a  semi-annual  pre¬ 
mium  of  not  less  than  $1,000,  and  on  the  further  conditions  that 
the  experience  record  and  the  moral  hazard  of  the  risk  be  satis¬ 
factory  and  that  the  employer  install  a  safety  equipment  and 
organization  according  to  a  standard  to  be  fixed  by  the  State  Fund. 
The  Manager  of  the  State  Fund  has  been  instructed  to  offer  the 
plan  to  policyholders  in  general  groups  on  this  basis.  It  is  be¬ 
lieved  that  the  extension  of  the  provisions  of  the  plan  to  all 
employers  having  the  required  amount  of  premium  who  may  be 
willing  to  conform  to  the  other  specified  conditions  will  obviate 
the  only  criticism  against  the  plan,  as  hitherto  applied,  which  has 
valid  basis. 

Some  Corrections 

Some  of  the  statements  made  by  Mr.  Connor  concerning  this 
experience  rating  plan  call  for  correction.  Mr.  Connor  states  that 
“  the  plan  was  promulgated  by  the  State  Insurance  Fund  without 
authorization  by  the  State  Industrial  Commission.” 

It  is  true  that  the  experience  rates  determined  under  this  plan, 
and  also  those  fixed  under  the  plans  operated  by  the  Compensa¬ 
tion  Inspection  Rating  Board  at  different  times,  have  not  been 
reported  to  the  Commission  for  specific  approval  by  resolution, 
as  all  matters  of  merit  and  experience  rating  have  been  treated 
as  a  part  of  the  underwriting  office  routine.  Two  different  plans 
of  merit  rating,  and  three  different  plans  of  experience  rating, 
have  been  in  operation  for  the  State  Fund,  no  one  of  which  has 
been  referred  to  the  Commission  for  a  resolution  of  approval.  It 
has  not  been  the  practice  of  the  Commission  to  pass  resolutions 
on  matters  relating  to  underwriting  and  actuarial  procedure  in 
the  office  of  the  State  Fund. 


Answer  to  Report  of  Jeremiah  F.  Connor 


57 


Mr.  Connor  states :  “  Employers  receiving  this  special  rating 

plan  are  supposed  to  have  safety  and  medical  organizations.  To 
say  the  least,  these  organizations  are  somewhat  loose  and  do  not 
appear  to  he  checked  up  hy  the  State  Fund.” 

This  statement  is  not  warranted  hy  the  facts.  Each  risk  offered 
for  special  experience  rating  is  carefully  scrutinized  with  respect 
to  its  past  experience  and  present  hazard,  and,  in  particular,  the 
arrangements  for  medical  treatment  of  employees  and  the  safety 
equipment  and  organization  are  examined,  to  insure  that  they  com¬ 
ply  with  the  standards  of  the  State  Fund. 

Mr.  Connor  characterizes  the  provision  for  an  additional  pre¬ 
mium  charge,  not  exceeding  50  per  cent,  in  the  event  of  a  deficit 
as  “  more  or  less  of  a  gentleman’s  agreement,”  and  cites  the 
refusal  of  the  Cutler  Desk  Company  to  pay  the  additional  charge. 
“  In  the  case  of  the  Cutler  Desk  Company,”  he  declares,  “  which 
operated  under  this  plan  under  the  Wynkoop  Service,  in  which 
the  losses  were  far  in  excess  of  the  premium,  the  employer  refused 
to  pay  the  excess  premium,  and  the  matter  has  been  referred  to 
the  Attorney-General  for  collection.  The  Cutler  Desk  Company 
is  one  case  at  least  in  which  the  Wynkoop  Service  did  not  prevent 
accidents.” 

The  provision  with  respect  to  the  50  per  cent  additional  pre¬ 
mium  charge  is  embodied  in  the  rules  of  the  experience  rating 
plan  and  is  explained  to  every  employer  who  elects  to  come  under 
the  provisions  of  the  plan.  The  plan  was  applied  to  the  risk  of 
the  Cutler  Desk  Company  at  the  request  of  the  Wynkoop  Service, 
which  had  been  duly  authorized  in  a  communication  addressed  hy 
the  Cutler  Desk  Company  to  the  State  Fund  to  represent  the 
company  in  all  its  transactions  with  the  State  Fund.  The  experi¬ 
ence  on  this  risk  for  the  two  policy  periods  during  which  the  State 
Fund  carried  it  was  unfavorable  and  resulted  in  an  additional 
premium  charge.  The  Cutler  Desk  Company  withdrew  from  the 
State  Fund  at  the  close  of  the  second  policy  period  and  refused  to 
pay  the  additional  premium  charge.  The  matter  was  then  reported 
to  the  Attorney-General. 

It  should  he  noted  that  in  this  case,  and  in  all  others  in  which 
the  experience  rating  plan  produces  a  deficit,  the  plan  works  for 
the  protection  of  the  general  group  in  which  the  experience-rated 


State  Insurance  Fund 


risk  is  placed  and  of  the  State  Fund,  as  a  whole,  for  it  imposes 
upon  the  employer  a  part  of  the  deficit,  to  the  amount  of  50  per 
cent  of  the  semi-annual  premium,  whereas,  if  the  risk  had  not 
been  experienc&rated,  the  entire  amount  of  the  deficit  would  have 
fallen  upon  the  group  and  the  State  Fund. 

It  should  also  he  stated  in  justice  to  the  Wynkoop  Service  that 
the  unfavorable  experience  on  this  risk  was  due  to  war  conditions. 
The  Cutler  Desk  Company  engaged  in  the  manufacture  of  aero¬ 
plane  parts,  and,  in  order  to  rush  the  work,  took  on  inexperienced 
employees  in  large  numbers,  as  the  labor  situation  was  such  that 
trained  operatives  could  not  be  found.  Safety  provisions  were 
neglected ;  machine  guards  installed  by  the  Wynkoop  Service  were 
removed  over  night.  In  short,  labor  conditions  made  it  impossible 
to  carry  on  effective  accident  prevention  work. 

Mr.  Connor  further  states  that  the  experience  rating  plan  “  is 
supposed  to  apply  only  to  employers  having  a  premium  of  $1,000, 
hut  even  this  rule  is  not  enforced.” 

This  statement  is  wholly  without  foundation.  Ho  risk  yielding 
a  sem-annual  premium  of  less  than  $1,000  has  ever  been  subject 
to  experience  rating.  It  would  be  impossible  for  a  risk  that 
failed  to  produce  an  earned  premium  of  $1,000  to  get  any  rate 
readjustment  under  the  experience  rating  plan,  as  each  experience 
statement  for  risks  subject  to  the  plan  must  be  checked  and 
approved  by  the  actuary  and  the  manager  of  the  State  Fund 
before  it  passes  through  the  routine  of  rate  readjustment.  It  has 
happened  in  one  or  two  cases  that  a  risk  accepted  provisionally 
for  a  special  experience  rating,  on  condition  that  it  should  pro¬ 
duce  an  earned  premium  of  not.  less  than  $1,000,  failed  at  the 
end  of  a  policy  period  to  qualify  for  a  rating  because  the  actual 
earned  premium  fell  short  of  the  required  minimum.  Hot  a  single 
instance  can  be  cited  of  the  grant  of  a  special  experience  rating 
to  a  risk  producing  a  semi-annual  premium  below  the  $1,000 
minimum. 

Charge  for  Deficit 

Mr.  Connor  also  cites  the  case  of  the  Hiagara  Alkali  Company, 
to  show  the  alleged  unfairness  of  the  experience  rating  plan  in 
its  effect  on  other  employers  in  the  State  Fund.  u  In  this  case,” 
he  states,  “  the  premium  from  July  1,  1918  to  January  1,  1919 


Answer  to  Report  of  Jeremiah  F.  Connor 


5,9 


was  $9,905.91.  The  losses  were  $24,000  which  together  with  a 
charge  of  5  per  cent,  for  catastrophe,  7%  per  cent  for  expenses 
and  5  per  cent  for  excess  risk,  made  the  total  charge  against  the 
premium,  $25,712.86,  a  deficiency  of  $15,806.95,  chargeable 
against  the  general  employers  in  the  State  Fund.  Under  the 
special  rule  this  employer  should  have  been  charged  an  excess  of 
50  per  cent  and  even  then  the  deficiency  would  have  been  about 
$10,000.  The  State  Fund,  however,  has  not  in  this  case  billed 
the  employer  for  the  excess  premium  of  50  per  cent.  This  is 
probably  due  to  a  desire  to  “  ascertain  whether  the  experience 
will  not  eventually  become  so  favorable  that  the  State  Fund  may 
decide  not  to  collect  the  excess  premium.” 

This  statement  rests  on  a  misconception  of  the  operation  of  the 
State  Fund  experience  rating  plan.  In  this  case,  as  in  the  case 
of  the  Cutler  Desk  Company,  an  additional  charge  of  50  per 
cent  of  the  premium  was  imposed  on  account  of  a  deficit.  The 
Niagara  Alkali  Company  is  still  insured  in  the  State  Fund,  and 
the  additional  premium  charge,  which  was  incurred  for  the  policy 
period  ended  December  31,  1918,  will  be  deducted  from  the  sur¬ 
plus  earned  in  succeeding  policy  periods,  in  accordance  with  the 
rule  of  the  experience  rating  plan.  This  adjustment  will  be  made 
in  the  statement  rendered  for  the  current  policy  period  ending 
June  30,  1919.  The  status  of  the  account  for  the  preceding 
policy  period,  which  produced  the  deficit,  has  already  been 
explained  to  the  policyholder,  and  no  objection  to  the  imposition 
of  the  additional  premium  charge  has  been  raised  by  the  Niagara 
Alkali  Co.  Mr.  Connor  speaks  of  the  deficit  “as  chargeable 
against  general  employers  in  the  State  Fund.”  He  overlooks  the 
fact  that  the  experience  rating  plan  in  a  case  like  this  as  has  been 
pointed  out,  works  to  the  advantage  of  the  other  policyholders, 
as  it  imposes  a  part  of  the  deficit  upon  the  employer  subject  to 
the  experience  rating  plan  and  affords  proportionate  relief  from 
this  burden  to  the  general  group  in  which  his  risk  is  placed,  and 
the  State  Fund  as  a  whole.  In  the  case  under  consideration  the 
Niagara  Alkali  Company  paid  precisely  the  same  premium  that 
it  would  have  paid  as  a  member  of  a  general  group  not  subject  to 
the  experience  rating  plan,  as  the  plan  failed  to  yield  any  rate 
reduction  at  the  end  of  the  policy  period,  and  besides  this  the 


60 


State  Insurance  Fund 


company  incurred  an  obligation  to  contribute  50  per  cent  of  the 
amount  of  such  premium  toward  the  incurred  deficit  in  the  form 
of  a  charge  against  any  surplus  earned  in  succeeding  policy 
periods.  Had  the  policyholder  withdrawn  from  the  State  Fund  at 
the  end  of  the  period  preceding  the  deficit,  the  amount  of  the 
additional  premium  charge  would  have  been  payable  in  cash,  as 
in  the  case  of  the  Cutler  Desk  Company. 

In  short,  instead  of  working  a  hardship  to  other  employers 
in  the  State  Fund,  as  Mr.  Connor  mistakenly  represents,  the 
experience  rating  plan,  in  the  event  of  a  deficit,  operates  to  the 
pecuniary  benefit  of  the  State  Fund  and  other  policyholders  in 
the  group  carrying  an  experience-rated  risk,  as  it  helps  to  absorb 
the  deficit,  at  least  in  part,  which  otherwise  would  fall  wholly 
upon  the  general  surplus  of  the  group  in  question. 

Cost  and  Value  of  Service 

Mr.  Connor  contends  that  “  every  service  performed  by  ”  the 
Wynkoop  Service  for  the  employer  should  be  performed  “  by  the 
State  Insurance  Fund  itself.” 

The  State  Fund  could  not  possibly  furnish  to  policyholders  the 
type  of  specialized,  intensive,  individual  expert  service  which  a 
private  organization  can  supply.  The  number  of  policyholders 
is  too  large  and  the  available  and  obtainable  force  of  safety 
engineers  and  other  experts  is  too  small.  The  State  Fund  is 
forced  to  operate  under  the  rigid  restrictions  of  the  budgetary 
system  and  the  Civil  Service.  Under  the  limitations  and  handi¬ 
caps  imposed  upon  the  State  Fund  by  conditions  inherent  in  the 
public  service,  it  would  be  impossible  to  build  up  an  expert  service 
organization  that  would  meet  fully  the  needs  of  all  policyholders 
in  this  respect.  It  would  obviously  be  inequitable  to  provide 
special  medical  and  safety  service  for  some  policyholders  and 
some  groups,  without  extending  it  to  all.  There  is,  therefore, 
ample  room  for  a  compensation  service  agency  of  the  type  which 
the  Wynkoop  Service  represents,  to  do  much  more  for  employers 
than  the  State  Fund  can  possibly  do  for  all  of  its  policyholders,  or 
for  any  of  its  policyholders,  with  due  regard  to  an  equitable 
treatment  of  all. 

In  this  connection  Mr.  Connor  charges  that  the  cost  of  the 


Answer  to  Report  of  Jeremiah  F.  Connor 


61 


Wynkoop  Service,  estimated  at  one-half  of  the  40  per  cent,  divi¬ 
dend  to  policyholders  in  Group  17,  or  20  per  cent,  of  the  premi¬ 
um,  is  “  ridiculous  and  excessive.” 

It  should  he  borne  in  mind  that  the  20  per  cent,  of  the  pre¬ 
mium  received  by  the  Wynkoop  Service  is  not  clear  profit,  but 
must  provide  for  the  salaries  of  inspectors,  physicians,  investi¬ 
gators,  statisticians,  and  other  expenses  of  the  service  organiza¬ 
tion.  It  is  pertinent  to  point  out  here  that  the  average  ratio  of 
management  expenses  to  premiums  for  the  mutual  insurance  com¬ 
panies  in  this  State,  in  1917,  was  22.1  per  cent.  The  remunera¬ 
tion  of  the  Wynkoop  Service,  whether  excessive  or  not,  is  based 
upon  contracts  with  the  employers  using  this,  service.  The  pro¬ 
vision  of  the  contract  with  respect  to  the  division  of  saving  in  the 
compensation  costs  between  the  employer  and  the  service  organi¬ 
zation  would  seem  to  be  purely  a  private  concern  as  between  these 
two  parties.  It  should  perhaps  be  stated  here  that  the  Wynkoop 
Service  has  under  consideration  a  plan  for  modifying  the  present 
system  of  charges  for  the  service  which  will  do  away  with  the 
contingent  feature  and  place  the  charges  upon  a  fixed  basis. 

Mr.  Connor  intimates  that  the  Wynkoop  Service  is  not  only 
excessively  costly,  but  also  is  practically  valueless  to  employers, 
or,  in  other  words,  that  the  Wynkoop  Service  does  very  little  if 
anything  in  return  for  the  alleged  high  cost  of  the  service.  He 
states :  “  I  firmly  believe  that  the  high  dividends  and  the  income 
of  the  Wynkoop  Service  is  due  largely  to  the  special  group  plan, 
and  that  the  same  employers  would  receive  nearly  as  high  divi¬ 
dends  in  the  special  group  without  the  Wynkoop  Service.  As  a 
matter  of  fact,  other  employers  in  special  groups,  who  do  not  have 
this  service  receive  as  high,  and  probably  in  some  cases,  higher 
dividends.” 

It  is  not  the  purpose  of  this  review  of  Mr.  Connor’s  report  to 
hold  a  brief  for  the  Wynkoop  Service,  but  as  statements  of  this 
kind  reflect  indirectly  upon  the  State  Fund  and  the  Commission, 
it  is  pertinent  to  present  some  facts  bearing  on  this  question. 

If  the  Wynkoop  Service  is  of  real  value  in  preventing  acci¬ 
dents  and  reducing  compensation  costs  for  the  employer,  this 
ought  to  be  reflected  in  reduced  losses  or  improved  experience  of 
risks  supervised  under  this  service  organization.  An  exhibit  of 


State  Insurance  Fund 


62 

the  comparative  loss  ratios  of  the  group  for  employers  using  the 
Wynkoop  Service  and  of  the  general  groups  of  the  State  Fund, 
in  which  these  risks  would  otherwise  be  placed,  is  significant  here. 
The  combined  average  loss  ratio  of  the  two  general  groups  con¬ 
taining  metalware  risks,  for  the  three  policy  periods,  beginning 
July  1,  1917,  the  date  of  the  establishment  of  the  Miscellaneous 
Metalware  Group,  was  65.2  per  cent.  In  computing  this  loss 
ratio,  due  allowance  has  been  made  for  the  distribution  of  metal¬ 
ware  risks  as  between  the  two  groups.  The  loss  ratio  of  the  mis¬ 
cellaneous  metalware  group,  made  up  of  risks  having  the  Wyn¬ 
koop  Service,  for  the  same  period,  was  only  43.6  per  cent.  The 
loss  ratio  of  the  special  group  using  the  Wynkoop  Service  was 
thus  35%  lower  than  the  loss  ratio  of  the  general  groups  contain¬ 
ing  risks  of  similar  character. 

Comparison  may  also  be  made  between  the  accident  experience 
of  risks  insured  in  the  State  Fund  before  and  after  taking  the 
Wynkoop  Service.  Mr.  Connor  remarks  that  among  the  employ¬ 
ers  in  the  group  having  Wynkoop  Service  are  some  who  were 
already  insured  in  the  State  Fund.  It  is  interesting  to  compare 
the  experience  of  such  risks  prior  to  their  contract  with  the  Wyn¬ 
koop  Service  with  their  experience  thereafter.  One  large  concern 
engaged  in  metalware  manufacture  has  been  with  the  State  Fund 
since  July  1,  1914,  and  since  July  1,  1917,  has  received  the  Wyn¬ 
koop  Service  as  a  member  of  the  Miscellaneous  Metalware  Group. 
During  the  three-year  period,  from  July  1,  1914,  to  July  1,  1917, 
when  this  risk  was  not  under  the  Wynkoop  Service,  the  total  pre¬ 
mium  receipts  were  $16,705.49,  and  the  incurred  losses  were 
$14,630.46,  giving  a  loss  ratio  of  87.6  per  cent.  During  the 
eighteen  months  period,  from  July  1,  1917,  to  December  31, 
1918,  the  premium  receipts  were  $21,349.96,  and  the  incurred 
losses  were  $7,485.53,  giving  a  loss  ratio  of  35.1  per  cent.  The 
loss  ratio  in  the  second  period  under  the  Wynkoop  Service  was 
thus  considerably  less  than  one-half  of  that  for  the  prior  period 
without  that  service,  and  this,  notwithstanding  the  fact  that 
under  the  increased  pressure  of  operations,  attendant  upon  rapid 
expansion  during  the  second  period,  a  higher  loss  ratio  would 
naturally  have  been  expected.  If  objection  be  raised  to  this  com¬ 
parison  on  the  score  that  it  takes  no  account  of  changes  in  rates, 


Answer  to  Report  of  Jeremiah  F.  Connor 


G3 


it  may  be  well  to  point  out  that  a  comparison  of  the  net  loss  cost 
per  $100  of  payroll,  yields  substantially  the  same  result,  and  in 
such  a  comparison,  of  course,  there  is  no  factor  of  error  due  to 
rate  changes.  The  net  loss  cost  per  $100  of  Manufacturing  pay¬ 
roll  in  the  first  period  was  82.2  cents;  in  the  second  period  it  was 
46.5  cents. 

Another  concern,  operating  a  large  freight  terminal,  was  in¬ 
sured  with  the  State  Fund  from  September  30,  1914,  to  Septem¬ 
ber  30,  1917,  when  the  insurance  was  cancelled,  and  later  re¬ 
turned  to  the  State  Fund  for  one  period,  from  November  30, 
1917,  to  May  30,  1918,  under  the  Wynkoop  Service.  This  policy 
was  again  cancelled  at  the  close  of  the  six  months’  period  desig¬ 
nated,  in  consequence  of  the  assumption  of  control  of  the  opera¬ 
tions  of  the  insured  by  the  United  States  Railroad  Administration. 
During  the  first  three  years  of  insurance  with  the  State  Fund, 
the  premium  receipts  were  $31,900.69,  and  the  incurred  losses 
were  $33,154.90,  giving  a  loss  ratio  of  103.9  per  cent.  The  net 
loss  cost  per  $100  of  payroll  was  $3.79.  During  the  last  six 
months  period  under  the  Wynkoop  Service,  the  premium  receipts 
amounted  to  $7,817  and  the  incurred  losses  were  $314.17,  giving 
a  loss  ratio  of  4  per  cent.  The  net  loss  cost  per  $100  of  payroll 
was  17  cents.  It  should  be  noted  that  the  State  Fund  assumed 
the  medical  liability  during  the  first  period,  but  not  during  the 
second.  The  medical  cost  was  accordingly  included  in  the  loss 
ratio  for  the  first  period,  but  not  for  the  second.  This  made  the 
figures  for  the  loss  ratio  and  net  loss  cost  for  the  first  period  rela¬ 
tively  higher  than  the  figures  for  the  last  period.  The  loss  ratio 
for  the  first  period,  exclusive  of  medical,  was  94.4  per  cent.,  and 
the  net  loss  cost  on  the  same  basis  was  $3.45. 

These  comparisons  would  appear  to  indicate  that  the  Wynkoop 
Service  has  been  of  some  value  to  employers  and  employees  in  the 
way  of  preventing  accidents  and  bringing  about  an  improved 
experience. 

Inspection  Work 

Mr.  Connor  further  intimates  that  the  inspection  work  for 
risks  under  the  Wynkoop  Service  is  really  performed  largely  by 
the  State  Fund.  He  states: 

“  One  would  naturally  assume  that  the  inspection  work 
necessary  to  install  safety  guards  for  preventing  accidents 


64 


State  Insurance  Fund 


would  be  performed  by  the  Wynkoop  Service.  It  appears, 
however,  that  in  most  of  the  cases,  this  part  of  the  Wynkoop 
Service  is  performed  by  the  State  Insurance  Fund  itself 
through  its  safety  engineer.77 

A  report  upon  the  inspections  made  by  the  State  Fund  for 
twenty-live  risks  using  the  Wynkoop  Service  was  furnished  Mr. 
Connor  at  his  request  by  the  safety  engineer  of  the  State  Fund. 
This  report  showed  that  no  inspection  had  been  made  by  the  State 
Fund  in  the  case  of  eleven  of  these  risks;  that  seven  inspections 
had  been  made  at  the  request  of  the  underwriting  division  of  the 
State  Fund,  such  inspections  being  solely  for  the  purpose  of 
determining  the  proper  method  of  classifying  and  underwriting 
the  risk;  that  four  safety  inspections  had  been  made  prior  to 
July  1,  1917,  the  date  of  the  formation  of  the  special  group  for 
employers  having  the  Wynkoop  Service;  that  only  five  safety 
inspections  had  been  made  subsequent  to  that  date,  two  of  which 
were  at  the  request  of  the  policyholder,  and  three  of  which  were 
inspections  of  risks  using  the  Wynkoop  Service,  but  not  included 
in  the  special  group.  Only  one  of  the  inspections  was  made  at 
the  request  of  the  Wynkoop  Service.  In  transmitting  his  report, 
the  chief  safety  engineer  stated: 

“All  of  the  risks  listed  are  clients  of  the  Wynkoop  Service. 
This  service  maintains  a  Safety  Inspection  Department 
which  co-operated  with  us  in  the  inspection  of  these  risks. 
For  this  reason  we  have  not  inspected  these  risks  as  fre¬ 
quently  as  risks  not  having  the  benefit  of  such  service.  As 
mentioned  above,  our  force  of  safety  inspectors  has  never 
been  sufficiently  large,  and  in  view  of  the  fact  that  the  Wyn¬ 
koop  Service  makes  safety  inspections  of  its  clients7  plants, 
it  seemed  to  me  that  it  would  be  duplicating  their  work,  to 
some  extent,  for  us  to  inspect  the  risks  in  question  as  fre¬ 
quently  as  we  try  to  inspect  the  majority  of  our  risks. 

“  There  appears,  therefore,  to  be  no  foundation  for  the 
charge  that  the  State  Fund  is  really  doing  for  the  Wynkoop 
Service  the  safety  inspection  work  which  the  latter  is  sup¬ 
posed  to  perform.77 

Indeed,  in  the  next  paragraph  of  the  report  following  the  com¬ 
ment  upon  the  inspection  work  of  the  Wynkoop  Service,  Mr.  Con- 


Answer  to  Report  of  Jeremiah  F.  Connor 


65 


nor  remarks  that  “  Mr.  Wynkoop  has  done  well  in  some  cases,  the 
work  tending  to  prevent  accidents,  work  which  the  State  Fund 
should  have  done  for  nothing.”  That  is,  in  one  paragraph  it  is 
charged  that  the  Wynkoop  Service  has  not  done  this  work  in 
most  cases,  hut  has  depended  upon  the  State  Fund  for  its  inspec¬ 
tion  service,  and  in  the  next  paragraph  it  is  stated  that  this  work 
has  been  done  well  by  the  Wynkoop  Service  in  some  cases,  but  that 
it  ought  to  have  been  done  by  the  State  Fund  for  nothing. 

Policy  Toward  Claimants 

Mr.  Connor,  while  conceding  some  merit  to  the  accident  pre¬ 
vention  work  performed  by  Mr.  Wynkoop,  declares: 

“  His  energies  are  devoted  far  more  toward  keeping  down 
the  payment  of  compensation  after  an  accident  has  occurred. 
He  gets  the  claimant  to  pursue  other  remedies  wherever  pos¬ 
sible  and  when  compensation  has  to  be  paid  he  gets  the  em¬ 
ployee  back  to  work  at  the  earliest  possible  moment.  He 
told  me  of  one  case  in  which  he  required  a  man  with  a  broken 
leg  to  work  as  a  watchman  while  the  fracture  was  healing.” 

This  case  is  the  only  one  cited  by  Mr.  Connor  in  substantiation 
of  the  accusation  that  the  Wynkoop  Service  pursues  reprehensible 
methods  for  the  purpose  of  keeping  down  the  payment  of  com¬ 
pensation.  Ho  evidence  of  such  tactics  has  ever  come  to  the 
attention  of  the  management  of  the  State  Fund,  and  it  is  needless 
to  state  that  a  policy  toward  claimants  of  the  character  intimated 
by  Mr.  Connor  would  not  for  a  moment  be  tolerated  by  the  State 
Fund  or  the  Commission. 

So  far  as  the  pursuit  of  other  remedies  by  claimants  is  con¬ 
cerned,  it  is  ordinarily  in  the  interest  of  the  claimant  to  elect 
to  sue  a  third  party,  if  he  has  ground  for  action,  as  the  law  pro¬ 
tects  him  fully  in  the  exercise  of  this  right  by  assuring  him  the 
amount  of  the  difference  between  the  damages  recovered  in  such 
an  action  and  the  compensation  to  which  he  is  entitled  under  the 
law.  It  is  impossible  for  a  claimant  pursuing  his  remedy  against 
a  third  party  in  the  courts  to  lose  anything  by  taking  this  course, 
as  he  is  guaranteed  in  any  event  the  full  amount  to  which  he  is 
entitled  in  the  form  of  compensation,  and  he  may  recover  in  the 
form  of  damages  a  larger  amount,  if  his  suit  is  successful.  From 
3 


66 


State  Insurance  Fund 


the  point  of  view  of  the  State  Fund,  it  is  obviously  desirable  that 
a  third  party  action  should  be  brought  whenever  there  is  a  reason¬ 
able  chance  of  recovery,  as  the  liability  of  the  State  Fund  is 
reduced  by  the  amount  of  damages  so  recovered  by  claimants. 

Furthermore,  it  is  desirable,  other  things  equal,  that  injured 
employees  should  be  gotten  back  to  work  at  the  earliest  possible 
date,  provided,  of  course,  that  the  employee  in  each  case  is 
physically  fit  to  resume  employment.  In  reference  to  the  broken 
leg  case  cited  by  Mr.  Connor,  investigation  of  the  records  of  the 
Wynkoop  Service  discloses  that  the  employee  was  not  put  to  work 
at  all.  The  suggestion  was  made  by  Mr.  Wynkoop  that  he  be 
put  to  work  as  a  watchman,  with  the  understanding  that  this 
should  be  done  only  with  the  consent  of  the  employee  himself 
and  with  the  approval  of  the  physician  in  charge.  This  was  not 
done,  however,  as  a  medical  examination  disclosed  a  constitutional 
disease  that  necessitated  special  treatment. 

Mr.  Connor  stated: 

“  The  Wynkoop  Service  in  most  cases  prepares  the  reports 
of  the  employer,  the  reports  of  the  attending  physician,  and 
the  papers  for  the  claimant  to  sign.” 

This  statement  is  incorrect.  Both  the  employer  and  the  attend¬ 
ing  physician  prepare  their  own  reports  of  accidents,  but  the 
claimant  in  many  cases  is  assisted  in  making  out  the  claim  papers. 
In  this  connection  Mr.  Connor  refers  to  the  “  Facts  Agreed  ” 
calendars  that  are  used  for  some  State  Fund  cases.  This  calendar 
was  devised  for  the  purpose  of  expediting  the  disposal  of  claims 
and  getting  money  into  the  hands  of  workmen  with  the  least 
possible  delay.  To  this  end  the  practice  was  adopted  of  placing 
upon  the  “  Facts  Agreed  ”  calendars  cases  in  which  the  State 
Fund  acquiesced  in  the  proposed  award  according  to  the  claim 
folder  prepared  by  the  Bureau  of  Claims  of  the  Commission.  In 
such  cases  where  the  Claims  Division  of  the  State  Fund  and  the 
Bureau  of  Claims  of  the  Commission  were  in  entire  agreement 
regarding  the  facts,  there  seemed  to  be  no  occasion  for  hearing 
with  its  attendant  delay.  On  the  other  hand,  cases  in  which  the 
State  Fund  had  reason  to  question  or  contest  a  proposed  award 
were  placed  on  special  calendars  for  a  hearing.  It  should  be 
stated  that  the  “  Facts  Agreed  ”  calendar  is  used  only  for  con¬ 
tinued  cases;  no  cases  are  closed  on  this  calendar. 


Answer  to  Report  of  Jeremiah  F.  Connor 


67 


Mr.  Connor  further  affirms  his  belief  (i  that  many  of  the  Wyn- 
koop  cases  are  underpaid.” 

No  cases  are  cited  in  support  of  this  contention.  It  would 
doubtless  be  possible  to  find  some  cases  in  any  list  taken  from 
the  files  of  the  Commission  in  which  the  claimant  had  been  under¬ 
paid,  but  an  impartial  scrutiny  of  all  the  cases  in  such  an  examina¬ 
tion  would,  with  equal  certainty,  disclose  many  in  which  the 
claimant  had  been  overpaid.  The  sweeping  statement  that  “  many 
of  the  Wynkoop  cases  are  underpaid  ”  is  accompanied  by  no  evi¬ 
dence  whatever,  and  the  State  Fund  has  no  knowledge  of  the 
existence  of  any  evidence  that  would  substantiate  the  broad 
assertion. 

Again,  Mr.  Connor  declares  that  the  Wynkoop  Service 

“  endeavors  to  have  all  notices  in  relation  to  claims  sent  to 
the  employee  and  the  employer  in  care  of  the  Wynkoop 
Service,  in  which  event  they  would  never  reach  the  real  par¬ 
ties  in  interest.  This  practice  was  not  permitted  by  the 
Industrial  Commission.” 

The  Wynkoop  Service  never  requested  that  notices  to  employees 
he  addressed  to  the  Wynkoop  Service.  Such  a  request  was  made 
with  reference  to  notices  to  employers  as  the  contract  with  the 
Wynkoop  service  gives  it  full  charge  of  correspondence  relating 
to  compensation  matters.  This  latter  request,  however  was 
denied,  and  notices  of  hearings  and  awards  are  sent  by  the  State 
Fund  directly  to  the  employer  in  all  cases. 

Rates  and  Dividends 

Mr.  Connor  complains  that  no  reduction  of  rates  have  been 
granted  to  the  risks  in  Group  17,  notwithstanding  the  favorable 
experience,  and  that  these  risks  have  not  been  reported  to  the 
Compensation  Inspection  Rating  Board  for  the  usual  experience 
rating.  Incidentally,  he  states  that  the  State  Fund  pays  $30,000 
per  year  to  the  Compensation  Inspection  Rating  Board  for  the 
purpose  of  adjusting  rates.  The  State  Fund  has  never  paid 
such  an  amount  for  the  services  of  the  rating  hoard.  The  total 
amount  paid  in  1917  was  $22,970.61  and  in  1918  $7,558.31. 

Mr.  Connor  cites  the  case  of  the  Habirshaw  Electric  Cable 


68 


State  Insurance  Fund 


Company,  a  risk  which  the  State  Fund  declined  to  submit  to  the 
rating  board,  and  states: 

“  Neither  this  risk  nor  any  other  risk  in  Group  17,  how¬ 
ever,  does  receive  an  experience  rating.  The  premium  is 
kept  at  its  high  level,  notwithstanding  the  favorable  experi¬ 
ence.  It  is  perfectly  obvious  that  this  practice  by  the  State 
Fund  results  in  higher  dividends,  one  half  of  which  goes 
to  the  Wynkoop  Service  at  the  end  of  each  six  months.” 

The  State  Fund  does  not  submit  any  risks  in  special  groups  to 
the  Compensation  Inspection  Fating  Board  for  experience  rating, 
for  the  reason  that  the  special  group  plan  in  itself  is  in  effect  a 
method  of  experience  rating,  and  it  would  not  be  consistent  or 
proper  to  superimpose  the  experience  rating  plan  of  the  rating 
board  in  the  special  group  plan  of  the  State  Fund.  This  practice 
is  not  confined  to  Group  17.  It  is  desirable,  from  the  point  of 
view  of  the  State  Fund  that  the  premium  income  of  a  special 
group  should  be  kept  on  a  reasonably  high  level  in  order  to 
minimize  the  possibility  of  a  deficit.  Furthermore,  the  larger 
the  group  premium  the  greater  the  contribution  to  the  expenses 
and  the  surplus  of  the  State  Fund,  which  are  prorated  on  the 
premiums  to  group  members. 

This  practice  is  of  no  advantage  whatever  to  the  Wynkoop 
Service.  Mr.  Connor’s  statement  that  the  refusal  to  apply  experi¬ 
ence  rates  on  the  risks  in  Group  17  increases  the  profit  of  the 
Wynkoop  Service  is  based  on  a  misconception.  It  makes  no 
difference  whatever  in  respect  to  the  profits  of  the  Wynkoop 
Service  whether  a  risk  is  subject  to  experience  rating  or  not. 
Under  the  contract  with  the  Wynkoop  Service,  any  saving  below 
a  certain  maximum  cost,  the  basis  of  which  is  usually  the  amount 
of  the  premium  according  to  the  manual  or  schedule  rates  of 
the  State  Fund  in  force  at  the  time  of  the  contract,  is  divided 
between  the  employer  and  the  Wynkoop  Service.  It  is  immaterial 
whether  the  saving  takes  the  form  of  a  rate  reduction  for  favor¬ 
able  experience  or  a  dividend.  If  no  experience  rating  is  applied, 
the  saving  is  all  in  the  form  of  a  dividend.  If  it  is  applied,  the 
saving  is  partly  in  the  form  of  a  rate  reduction  and  partly  in  the 
form  of  a  dividend,  smaller  in  proportion  to  the  amount  of  the 
rate  reduction.  For  example,  assume  a  case  of  a  risk  with  a 


Answer  to  Report  of  Jeremiah  E.  Connor 


69 


payroll  of  $500,000,  and  a  rate  of  $2,  yielding  a  premium  of 
$10,000.  If  the  total  charges  for  the  policy  period  amounted 
to  $6,000,  the  dividend  would  be  $4,000,  or  40  per  cent,  one-half 
of  which  would  go  to  the  Wynkoop  Service.  If  an  experience 
rating  reduction  of  25  per  cent  were  granted  to  the  risk  the  rate 
would  then  he  $1.50,  yielding  a  premium  of  $7,500.  The  divi¬ 
dend  would  be  $1,500,  or  15  per  cent.  The  total  amount  of 
saving  to  be  divided  between  the  employer  and  the  Wynkoop 
Service  would  be  40  per  cent,  including  25  per  cent  of  rate  reduc¬ 
tion,  and  15  per  cent  of  dividend,  exactly  the  same  as  if  no 
experience  rating  had  been  applied. 

In  general,  the  insinuation  that  the  State  Fund  keeps  up  the 
manual  rates  in  the  interest  of  the  Wynkoop  Service  is  absolutely 
without  foundation.  Fo  suggestion  to  this  effect  has  ever  come 
from  the  Wynkoop  Service,  and  no  such  consideration  has  ever 
entered  remotely  into  the  determination  of  the  policy  of  the  State 
Fund  respecting  rates. 

Further  Corrections. 

Mr.  Connor  charges  that  one  of  the  employers  having  the 
Wynkoop  Service  received  a  reduction  of  17%  Per  cent  for  the 
exclusion  of  medical  liability  from  the  policy,  whereas  he  was 
entitled  only  to  12%  per  cent.  He  states :  “  Some  employers  are 
only  entitled  to  a  reduction  of  12%  per  cent.  One  of  these  having 
the  Wynkoop  Service,  is  the  Brooklyn  Eastern  District  Terminal. 
The  State  Fund,  however,  allowed  the  Wynkoop  Service  the  full 
reduction  of  17%  per  cent  resulting  in  a  loss  to  the  State  Fund  of 
about  $400  for  a  policy  period  of  six  months  and  a  corresponding 
gain  to  the  Wynkoop  service.” 

Mr.  Connor  is  wrong  in  his  contention  that  the  risk  in  question 
was  only  entitled  to  a  12%  per  cent  reduction  for  the  medical 
liability.  The  reduction  of  17%  per  cent  is  properly  applicable 
to  a  risk  of  this  type,  having  a  permanent  and  central  location,  as 
this  enables  the  employer  to  make  effective  provision  for  the  medi¬ 
cal  and  hospital  treatment  of  employees,  precisely  as  in  the  case  of 
a  large  manufacturing  plant.  The  Brooklyn  Eastern  District 
Terminal  does  a  freighting  and  stevedoring  business,  but  it  has  a 
permanent  and  central  location  and  operates  warehouses  and 


70 


State  Insurance  Fund 


shops.  The  underwriting  of  this  risk  in  this  particular  by  the 
State  Fund  was  correct. 

Mr.  Connor  states  that  “  among  the  employers  enjoying  special 
treatment  because  of  the  Wynkoop  Service  is  one  engaged  in  the 
business  of  scow  trimming.  This  business  is  regarded  as  ex¬ 
tremely  hazardous  and  should  never  receive  rebates  or  dividends 
based  on  current  experience.” 

This  statement  is  incorrect.  The  special  experience  rating 
plan  has  not  been  applied  on  any  risk  of  the  class  described. 

Mr.  Connor  has  this  to  say  concerning  the  origin  of  the  Wyn¬ 
koop  Service: 

“  The  Wynkoop  Service  originated  in  the  State  Insurance 
Fund  about  four  years  ago  at  which  time  the  State  Fund 
insured  the  construction  of  the  Speedway  at  Sheepshead 
Bay.  Wynkoop  placed  this  insurance  in  the  State  Fund 
under  an  arrangement  by  which  the  employer  was  to  pay  the 
cost  of  treating  injured  claimants  and  under  which  the 
amount  saved  over  and  above  the  amount  of  claims  for  com¬ 
pensation  was  to  be  returned  to  the  employer  and  divided 
with  Wynkoop.  This  Sheepshead  Bay  transaction  was  never 
submitted  to  the  Workmen’s  Compenation  Commission  nor 
is  there  any  record  of  the  same  in  the  minutes  of  the 
Commission.” 

It  is  true  that  the  insurance  on  the  contract  for  the  construction 
of  the  Sheepshead  Bay  speedway  was  placed  in  the  State  Fund 
by  the  Wynkoop  Service.  But  no  arrangement,  such  as  Mr. 
Conner  outlines,  was  proposed  or  applied  on  this  risk.  The 
usual  reduction  was  granted  for  the  exclusion  of  medical  liability, 
which  was  not  carried  by  the  State  Fund.  The  risk  was  placed 
in  the  general  group  in  which  it  belonged,  and  the  final  adjust¬ 
ment  was  made  in  the  usual  manner.  There  was  no  special  group¬ 
ing  or  rating  of  any  kind.  As  this  was  a  matter  of  ordinary 
underwriting  routine,  there  was  no  reason  for  reporting  it  to  the 
Commission. 

The  following  statement  concerning  the  Wynkoop  Service  also 
calls  for  correction: 


Answer  to  Report  of  Jeremiah  F.  Connor 


71 


“  When  this  service  was  first  instituted  a  circular  letter 
was  sent  out  from  the  office  of  Mr.  Wynkoop  representing 
that  only  through  the  Wynkoop  Service  could  an  employer 
receive  large  dividends  from  the  State  Insurance  Fund. 
This  practice  was  condemned  and  stopped  by  the  Superin¬ 
tendent  of  Insurance.” 

The  communication  to  which  this  refers  was  not  a  circular 
letter  sent  out  when  the  Wynkoop  Service  was  first  instituted 
and  did  not  represent  that  an  employer  could  get  large  dividends 
from  the  State  Fund  only  through  this  service.  The  letter  was 
a  communication  addressed  to  an  employer  by  an  assistant  in  the 
office  of  the  Wynkoop  Service  in  November,  1917.  It  did,  how¬ 
ever,  contain  an  unfortunately  worded  and  possibly  misleading 
statement,  which  led  to  complaint  to  the  Superintendent  of  Insur¬ 
ance.  The  following  extract  from  a  communication  to  the  Wyn¬ 
koop  Service  by  the  Superintendent  of  Insurance  will  give  the 
true  version  of  this  matter: 

“April  17,  1918. 

*********** 

“As  you  doubtless  know,  the  particular  complaint  to 
which  I  have  been  giving  consideration  has  to  do  with 
the  following  statement  contained  in  the  third  para¬ 
graph  of  a  letter  which  you  addressed  to  Messrs.  Stein¬ 
way  &  Sons  of  107  East  14th  Street,  New  York  City, 
under  date  of  Nov.  16,  1917: 

‘  The  State  Fund  offers  through  us  an  experience 
rating  under  which  you  will  be  repaid  a  dividend 
amounting  to  all  of  the  premium  which  is  not  actually 
used/  etc. 

The  complaint  is  made  that  this  statement  contains  a  strong 
inference  that  only  through  you  can  such  large  dividends  be 
obtained,  and  that  there  is  an  implication  that  you  have  some 
kind  of  an  arrangement  or  connection  with  the  State  Fund 
by  which  you  can  obtain  the  payment  of  large  dividends 
which  others  cannot  obtain.  This,  of  course,  is  not  true,  since 
you  have  no  connection  with  the  State  Fund  in  any  way  and 
can  make  no  better  arrangements  with  it  than  anyone  else. 


72 


State  Insurance  Fund 


I  must,  therefore,  request  that  you  immediately  discontinue 
the  use  of  any  such  statement  as  that  recited  above,  in  your 
future  correspondence,  so  that  all  possibility  of  misconstruc¬ 
tion  may  he  eliminated. 

(Signed)  Jesse  S.  Phillips, 

Superintendent 


No  Tipping  System 

Mr.  Connor  intimates  that  the  Wynkoop  Service  is  tipped  off 
concerning  the  expiration  of  favorable  risks  in  the  State  Fund. 
He  states: 

“  Included  among  the  employers  in  the  Wynkoop  Group 
are  some  who  were  already  insured  in  the  State  Fund. 
Numerous  other  employers  in  the  State  Fund  have  been 
approached  by  representatives  of  the  Wynkoop  Service  just 
as  their  policies  were  about  to  expire.  This  suggests  at  least 
a  system  under  which  the  Wynkoop  Service  is  tipped  off  by 
someone  when  favorable  risks  in  the  State  Fund  are  about 
to  expire.” 

The  “  suggestion  ”  of  a  system  of  tipping  off  for  the  benefit 
of  the  Wynkoop  Service  is  wholly  unwarranted.  The  Wynkoop 
Service  is,  of  course,  free  to  solicit  business  at  all  times,  and 
does  solicit  large  risks  insured  in  the  stock  companies,  the  mutual 
companies  and  the  State  Fund.  It  is  well  known  that  most  State 
Fund  policies  expire  July  as  the  Workmen’s  Compensation 
Law  went  into  effect  on  that  date.  It  should  be  stated  here  that 
80  per  cent,  of  the  business  now  in  the  State  Fund  under  the 
Wynkoop  Service  is  new  business  brought  to  the  State  Fund  by 
this  organization. 

Finally,  Mr.  Connor  states: 

“  I  feel  it  my  duty  to  also  report  the  following  transac¬ 
tion:  An  officer  of  the  State  Insurance  Fund  filed  with  the 
Secretary  of  State  last  year  an  application  for  registration 
of  a  Peerless  coupe  automobile.  Mr.  Wynkoop  informed 
me  that  he  paid  for  this  automobile  with  his  personal  check 
and  that  it  was  a  gift  to  a  member  of  this  official’s  family.” 


Answer  to  Report  of  Jeremiah  F.  Connor 


73 


This  transaction  was  purely  a  private  affair  connected  in  no 
way  with  the  business  of  the  State  Fund.  Mr.  Wynkoop,  who 
is  an  intimate  friend  of  the  family  of  the  official  in  question, 
requested  a  member  of  the  family  to  select  a  car  and  asked  the 
privilege  of  paying  for  it.  The  gift  was  offered  under  circum¬ 
stances  and  in  a  way  that  made  the  acceptance  natural  and 
proper.  There  was  no  suggestion  of  any  business  consideration 
or  obligation.  Hor  was  there  any  secrecy  about  the  transaction. 
It  was  reported  by  this  official  to  the  chairman  of  the  commis¬ 
sion  at  the  time.  The  transaction  had  no  relation  to  the  affairs 
of  the  State  Fund. 

In  conclusion,  it  may  be  well  to  state  that  Mr.  Wynkoop  gets 
no  commissions  or  business  or  revenues  from  the  State  Fund. 
On  the  contrary,  he  has  brought  a  large  volume  of  desirable 
business  into  the  State  Fund  through  his  service  organization. 
Ho  special  favors  or  concessions  have  been  accorded  him  in  con¬ 
nection  with  this  business.  As  has  been  previously  stated,  no 
arrangement  with  respect  to  the  rating  and  grouping  of  risks 
placed  in  the  State  Fund  by  the  Wynkoop  Service  has  been 
offered  that  is  not  open  on  equal  terms  to  any  other  broker  or 
service  organization.  Indeed,  a  similar  plan  of  rating  and  group¬ 
ing  is  actually  in  operation  for  other  business  in  the  State  Fund. 

Treatment  of  Claimants 

Mr.  Connor  charges  delays  and  underpayments  in  the  treat¬ 
ment  of  claimants  by  the  State  Fund.  He  states: 

“  I  have  received  many  complaints  and  I  am  satised  that 
there  is  an  unreasonable  delay  in  making  payments  of  com¬ 
pensation  to  injured  workmen  out  of  the  State  Insurance 
Fund.” 

No  Unreasonable  Delay 

There  is  no  unreasonable  delay  in  the  ordinary  and  usual  pro¬ 
cedure  of  the  State  Fund  in  the  handling  of  claims.  It  is  only 
in  rare  and  exceptional  cases  that  any  unreasonable  delay  occurs. 
In  extenuation  of  such  delays  as  do  occur,  it  should  be  stated 
that  the  number  of  employees  in  the  Claim  Division  is  not  suffi¬ 
cient  to  meet  the  requirements  of  the  work.  Additional  em¬ 
ployees  were  requested  by  the  management  of  the  State  Fund, 
hut  were  not  granted  in  the  legislative  appropriation  for  the  next 


74 


State  Insurance  Fund 


year.  The  claim  service  is  constantly  growing.  More  investi¬ 
gators  are  needed, —  not  for  the  purpose  of  fighting  claims,  hut 
to  explain  the  law,  and  to  see  to  it  that  proper  medical  treatment 
is  provided,  that  the  claims  are  filed  promptly  after  the  accident 
and  that  claimants  are  not  misled  into  delay  in  filing  claims  in 
the  hope  of  obtaining  larger  compensation. 

The  case  of  William  Corcoran  is  cited  by  Mr.  Connor,  as  an 
example  of  delay  in  the  payment  of  compensation. 

“  This  claimant,”  he  states,  “  was  injured  December  13, 
1918,  and,  although  he  was  before  the  medical  adviser  of 
the  State  Fund  on  December  16,  1918,  and  was  again  exam¬ 
ined  by  a  State  Fund  doctor  on  December  30,  1918,  he 
received  no  compensation  until  about  March  1,  1919.” 

The  records  of  the  Commission  show  that  the  claim  in  this 
case  was  not  received  until  January  23,  1919.  The  first  award 
of  compensation  was  made  February  29,  and  the  check  was  sent 
to  the  claimant  promptly.  The  delay  in  this  case,  which  amounted 
to  about  one  month,  was  due  largely  to  the  unreasonable  attitude 
of  the  claimant.  It  should  he  emphasized  that  this  case  is  excep¬ 
tional  and  not  typical.  It  is  not  a  fair  example  of  the  claim 
service  of  the  State  Fund. 

Mr.  Connor  quotes  a  letter  from  the  American  Hard  Rubber 
Company  complaining  that  in  many  instances  employees  had  to 
wait  sometimes  as  long  as  five  months  for  the  receipt  of  compen¬ 
sation.  Ho  complaint  concerning  claim  service  was  made  by  the 
American  Hard  Rubber  Company  when  this  concern  was  insured 
in  the  State  Fund.  A  representative  of  the  State  Fund  recently 
made  inquiry  concerning  this  matter  at  the  office  of  the  American 
Hard  Rubber  Company  and  was  told  by  the  manager  that  there 
had  been  no  dissatisfaction  with  the  claim  service  of  the  State 
Fund. 

Cases  of  Alleged  Underpayment 

Mr.  Connor  states  that  he  has  received  many  complaints  that 
claimants  are  underpaid  and  cites  two  cases  as  follows: 

“  In  the  case  of  John  Carroll,  which  I  had  investigated, 
an  additional  award  was  made  of  $400.  In  the  case  of 
Jacob  Rehm,  who  was  employed  by  the  State  Department 
of  Public  Works,  an  additional  award  of  $119.38  was  made.” 


Answer  to  Report  of  Jeremiah  F.  Connor 


75 


It  appears  from  the  records  of  the  Commission  that  the  Carroll 
case,  after  a  long  period  of  temporary  disability  payments,  was 
settled  May  18,  1918,  by  an  additional  final  award  of  $1,100  for 
the  loss  of  the  nse  of  the  right  leg  and  the  partial  loss  of  the  use 
of  the  right  arm.  This  final  adjustment  was  made  in  accordance 
with  the  method  approved  by  the  Commission,  and  the  award 
was  made  on  the  basis  of  an  agreement  between  the  claimant, 
the  State  Fund  and  the  Commission.  The  attention  of  Mr.  Connor 
was  called  to  this  case  by  a  letter  from  the  claimant  or  a  member 
of  his  family  asking  for  more  compensation.  The  case  was 
accordingly  put  on  for  a  rehearing.  It  was  developed  at  the  hear¬ 
ing  that  the  claimant  had  lost  no  time  since  the  settlement  and 
was  still  working  at  wages  equivalent  to  the  pay  received  before 
the  accident.  However,  a  medical  examination  disclosed  that  the 
condition  of  the  arm  had  grown  worse  instead  of  improving; 
consequently,  it  appeared  that  the  original  settlement  did  not 
represent  fully  the  value  of  the  claimant’s  disability  at  the  later 
date,  although  at  the  time  of  the  settlement  it  seemed  equitable 
to  all  parties  concerned.  An  additional  year’s  compensation, 
amounting  to  $400,  was,  therefore,  offered  by  the  State  Fund  and 
accepted  by  the  claimant,  and  the  case  was  closed  on  this  basis. 

The  Rehm  case  was  closed  by  the  Commission  January  13, 
1919,  by  an  award  of  twelve  weeks’  compensation.  This  case 
was  one  of  a  double  hernia,  and  the  rule  of  the  Commission  has 
been  to  award  twelve  weeks’  compensation  for  this  type  of  dis¬ 
ability.  The  case  was  brought  to  Mr.  Connor’s  attention  by  a 
letter,  and  was  placed  on  the  calendar  for  a  rehearing.  Cor¬ 
respondence  had  passed  between  the  claimant  and  the  Albany 
office  of  the  Commission,  and  negotiations  were  underway  toward 
a  special  hearing  in  this  case  before  the  matter  was  taken  up 
by  Mr.  Connor.  At  the  rehearing  a  further  award  of  eighteen 
and  two-thirds  weeks’  compensation  was  made,  with  the  approval 
of  the  State  Fund,  and  the  case  was  closed  on  this  basis. 

Mr.  Connor  further  states: 

“  I  have  examined  cases  in  which  the  State  Fund  appeared 
unwilling  to  pay  the  amount  recommended  by  the  medical 
adviser  of  the  Commission  or  the  medical  adviser  of  its  own 
department.” 


76 


State  Insurance  Fund 


It  is  not  the  function  of  the  medical  adviser  of  the  Commis¬ 
sion  or  the  medical  adviser  of  the  State  Fund  to  fix  the  amount  of 
compensation.  In  some  cases  the  facts  developed  by  investiga¬ 
tion 'through  the  claim  division  of  the  State  Fund  may  furnish 
good  ground  for  questioning  the  recommendation  made  by  the 
medical  adviser. 

Fair  Play  for  Claimants 

In  general,  the  policy  of  the  State  Fund  in  its  claim  service 
is  to  give  absolutely  fair  treatment  to  every  claimant.  The  man¬ 
agement  of  the  State  Fund  would  not  tolerate  any  practices  not 
in  harmony  with  the  spirit  of  fair  play,  justice  and  humanity. 
At  the  same  time  it  is  most  important  always  to  scrutinize  claims 
with  due  vigilance  in  order  to  protect  the  State  Fund,  which  is 
a  trust  fund  made  up  of  moneys  contributed  by  employers,  against 
fraudulent  claims. 

The  intimation  is  apparently  conveyed  by  Mr.  Connor’s  com¬ 
ments  upon  the  claim  service  of  the  State  Fund  that  there  has 
been  deliberate  and  intentional  underpayment  in  some  cases. 
This  implicit  charge  must  be  repudiated  with  emphasis.  It  is, 
of  course,  possible,  in  examining  into  closed  cases,  some  time  after 
a  final  award,  to  discover  some  in  which  the  claimant  has  been 
underpaid  in  the  light  of  the  later  developments  in  the  case,  but, 
as  has  been  pointed  out,  it  would  be  possible,  if  an  impartial  exam¬ 
ination  of  a  considerable  number  of  cases  were  made,  to  show  that 
in  numerous  instances  the  claimant  had  been  overpaid.  The 
amount  to  which  the  claimant  is  entitled  is  often  a  matter  of 
judgment,  and  absolute  infallibility  in  all  cases  is  beyond  the 
range  of  human  attainment.  In  no  single  case,  however,  has  the 
State  Fund  intentionally  and  deliberately  become  a  party  to  an 
unfair  settlement. 

The  Medical  Question 

Mr.  Connor  makes  a  charge  of  favoritism  in  connection  with 
the  medical  service  of  the  State  Fund: 

“  The  State  Insurance  Fund,”  he  declares,  “  pays  far  more 
attention  to  getting  work  for  favored  doctors  than  it  does 
in  paying  compensation  to  the  claimants.  For  some  time 
the  State  Fund  has  endeavored  to  compel  all  its  employers 


Answer  to  Report  of  Jeremiah  F.  Connor 


77 


in  the  vicinity  of  New  York  City  to  send  all  injured  work¬ 
men  to  ‘  State  Fund  Dressing  Stations  ’  for  medical  treat¬ 
ment.  What  are  called  ‘  State  Fund  Dressing  Stations  ’ 
are  merely  offices  maintained  by  one  physician  to  whom, 
through  this  method,  the  State  Fund  attempts  to  send  all 
claimants  for  such  treatment.” 

The  assertion  that  the  State  Fund  pays  more  attention  to  getting 
work  for  favored  doctors  than  it  does  in  paying  compensation  to 
claimants  is  without  justification.  In  dealing  with  this  charge, 
it  is  necessary  first  to  outline  the  general  policy  of  the  State  Fund 
with  reference  to  medical  service. 

A  carefully  directed  system  of  medical  treatment  reflects  itself 
in  reduced  compensation  cost.  If  the  medical  service  of  an  insur¬ 
ance  carrier  is  not  supervised  properly,  both  the  medical  cost  and 
the  compensation  cost  will  be  unduly  high.  Systematic  provision 
of  competent  medical  treatment  for  injured  employees  helps  to 
prevent  infections,  to  shorten  the  disability  period,  to  reduce  the 
number  of  permanent  disability  cases,  and  thus  to  lower  the 
amount  that  must  be  paid  for  compensation.  The  unfortunate 
and  expensive  results  of  incompetent  medical  treatment  have  been 
paraded  before  trial  commissioners  in  many  cases.  It  must  be 
recognized  that  the  treatment  of  industrial  injuries  has  become 
a  special  branch  of  medical  practice.  The  average  family  physi¬ 
cian  has  neither  the  experience  nor  equipment  to  give  expert  treat¬ 
ment  in  compensation  cases.  In  order  to  secure  satisfactory 
results,  it  is  necessary  to  provide  a  system  of  dressing  stations 
with  physicians  trained  in  the  treatment  of  industrial  accidents 
and  familiar  with  compensation  work.  Practically  every  insur¬ 
ance  company  in  the  compensation  field  has  some  system  of  this 
kind  in  operation  and  recognizes  that  it  is  absolutely  essential 
to  the  satisfactory  and  economical  administration  of  compensation. 

The  Dressing  Stations. 

A  medical  service  organization  for  compensation  cases  exclu¬ 
sively  has  been  installed  in  the  Greater  Rew  York  territory  by 
Dr.  Meyer  Wolff.  This  physician,  who  specializes  in  compensa¬ 
tion  practice  and  maintains  over  thirty  dressing  stations  for  this 


78 


State  Insurance  Fund 


purpose,  is  the  one  to  whom  anonymous  reference  is  made  by 
Mr.  Connor. 

The  service  provided  by  Dr.  Wolff’s  organization  is  used,  not 
only  by  the  State  Fund,  but  by  various  other  insurance  carriers. 
The  State  Fund  tried  this  service  experimentally  and  found  it 
satisfactory  as  respects  both  the  character  and  the  cost.  The 
dressing  stations  maintained  by  Dr.  Wolff  are  conveniently  situ¬ 
ated  throughout  the  territory  of  Greater  New  York  to  serve  the 
needs  of  employers  and  employees.  It  would  not  be  possible 
for  the  State  Fund  or  any  single  insurance  carrier  to  provide  a 
system  of  dressing  stations  so  complete  and  so  well  adapted  to 
serve  the  convenience  of  policyholders  and  claimants  as  that  main¬ 
tained  by  Dr.  Wolff,  for  the  reason  that  no  single  carrier  could 
furnish  a  volume  of  work  sufficient  to  keep  the  stations  in  profit¬ 
able  operation.  The  central  service  station  of  Dr.  Wolff’s  organi¬ 
zation  is  open  night  and  day,  and  night  service  is  furnished  by 
other  stations  when  requested.  The  State  Fund  has  received  help¬ 
ful  co-operation  from  Dr.  Wolff’s  organization  in  various  details 
of  the  service.  For  example,  each  case  is  carefully  followed  from 
start  to  finish  and  discontinuance  of  treatment  is  recommended 
promptly  when  further  treatment  is  no  longer  required.  The  prac¬ 
tice  of  Dr.  Wolff’s  organization  in  this  respect  contrasts  favorably 
with  a  tendency  noticeable  on  the  part  of  some  physicians  to  pro¬ 
long  the  treatment  of  cases  unduly  and  thus  to  impose  needless 
expense  on  the  insurance  carrier.  Valuable  assistance  is  also 
rendered  by  Dr.  Wolff  in  making  special  examinations  and  re¬ 
ports,  in  co-operating  with  the  medical  and  claim  divisions  of  the 
State  Fund  in  the  preparation  of  cases,  and  at  hearings  before 
the  Commission. 

Low  Cost  of  Service 

With  reference  to  the  cost  of  this  service,  the  records  of  the 
State  Fund  show  that  the  average  amount  of  the  bills  rendered 
by.  Dr.  Wolff:  is  about  one-third  of  that  of  the  bills  rendered  by  all 
other  physicians  in  Greater  New  York  territory.  The  total 
amount  paid  by  the  State  Fund  for  the  services  rendered  by  Dr. 
Wolff’s  dressing  stations,  during  the  year  ended  December  31, 
1918,  was  $41,850.60,  and  the  average  bill  was  $5.51.  The  total 
payments  to  all  other  physicians  including  specialists  in  New 


Answer  to  Report  oe  Jeremiah  F.  Connor 


79 


York,  Brooklyn,  Long  Island  and  Staten  Island  for  the  same 
period  was  $82,908.55  and  the  average  bill  was  $15.97.  It  ap¬ 
pears  that  Dr.  Wolff  received  somewhat  more  than  one-half  of 
the  medical  work  of  the  State  Fund  in  this  territory,  measured 
by  the  number  of  cases,  but  received  only  one-third  of  the  amount 
of  the  money  spent  for  medical  services,  for  the  reason  that  his 
average  charge  was  only  one-third  of  that  of  the  other  physicians. 
The  cost  of  the  medical  service  on  two  large  government  contracts, 
furnished  by  Dr.  Wolffs  organization,  amounted  to  less  than 
7  per  cent,  of  the  premium,  as  contrasted  with  the  usual  allow¬ 
ance  of  12%  per  cent,  for  medical  cost  on  contracting  operations. 

In  this  connection,  it  may  be  pointed  out  that  the  general 
economy  of  the  medical  treatment  furnished  by  the  State  Fund 
is  shown  clearly  by  the  ratio  of  medical  cost  to  compensation  cost 
for  the  State  Fund  and  for  the  private  companies.  The  ratio  of 
medical  payments  to  compensation  payments  in  the  case  of  the 
State  Fund  for  four  and  one-half  years,  July  1,  i914,  to  Decem¬ 
ber  31,  1918,  averaged  12.4  per  cent.  This  ratio  in  the  case  of 
the  private  companies,  as  shown  by  reports  to  the  State  Insur¬ 
ance  Department,  on  policies  issued  in  the  years  1914,  1915  and 
1916,  averaged  21.6  per  cent.  Part  of  this  difference  may  pos¬ 
sibly  be  due  to  a  larger  proportion  of  policies  excluding  the 
medical  liability  in  the  case  of  the  State  Fund,  and  to  other 
factors,  but  the  figures  indicate  unmistakably  that  the  medical 
service  of  the  State  Fund  is  comparatively  less  expensive  than 
that  of  the  private  companies. 

A  Complaint  Examined 

Mr.  Connor  declares  that  “  this  medical  service  is  not  always 
satisfactory,  and  because  of  it,  some  employers  have  cancelled  their 
policies  in  the  State  Fund.” 

In  general,  this  service  has  been  highly  satisfactory  to  em¬ 
ployers  and  employees,  and  many  expressions  of  commendation 
have  come  to  to  the  office  of  the  State  Fund.  There  have,  of 
course,  been  some  complaints.  It  is  impossible  to  satisfy  every¬ 
body.  Mr.  Connor  cites  two  cases  of  alleged  dissatisfaction  and 
consequent  cancellation.  The  American  Safety  Razor  Companv, 
Brooklyn,  and  the  American  Hard  Rubber  Company,  College 


80 


State  Insurance  Fund 


Point,  L.  I.  With  respect  to  the  former,  it  is  true  that  this 
company  has  given  notice  of  intention  to  withdraw  from  the  State 
Fund,  but  the  real  reason  for  the  loss  of  their  account  was  not 
dissatisfaction  with  the  medical  service.  Mr.  Connor  gives  ab¬ 
stracts  from  a  letter  of  the  American  Hard  Rubber  Company, 
received  by  him,  which,  he  states,  “  explains  the  situation  in 
concise  language.”  The  substance  of  the  complaint  embodied  in 
this  letter  is  that  the  State  Fund  insisted  on  cutting  bills  rendered 
by  physicians  who  treated  employees  of  the  company  and  later 
installed  a  dressing  station  at  College  Point. 

It  is  true  that  the  State  Fund  refused  to  pay  in  full  some  bills 
rendered  by  local  physicians  for  treating  employees  of  this  com¬ 
pany.  This  action  was  taken  because  the  charges  were  plainly 
excessive,  ranging  about  50  per  cent,  higher  than  the  usual  scale 
of  fees  in  compensation  cases.  The  Workmen’s  Compensation 
Law  limits  the  fees  to  the  prevailing  charges  “  in  the  same  com¬ 
munity  for  the  treatment  of  injured  persons  of  a  like  standard 
of  living.”  The  physicians  at  College  Point  attempted  to  main¬ 
tain  a  special  standard  of  fees  for  that  community  which  seemed 
to  the  medical  division  of  the  State  Fund  to  be  unreasonably  high. 
Unfortunately,  there  are  some  physicians  who  appear  to  look  on 
the  State  Fund  as  a  wealthy  client  and  levy  charges  accordingly. 
All  insurance  carriers  have  their  difficulties  in  adjusting  medical 
bills,  and  the  Commission  has  been  obliged  to  establish  a  regular 
calendar  to  arbitrate  differences  between  physicians  and  insurance 
carriers.  In  order  to  meet  the  difficulty  at  College  Point,  a  State 
Fund  dressing  station  was  established  there,  and  the  American 
Hard  Rubber  Company  was  urged  to  send  injured  employees  to 
this  station.  The  State  Fund  endeavors  in  all  cases  to  secure  the 
co-operation  of  employers  in  the  use  of  the  dressing  stations, 
believing  that  such  co-operation  is  a  benefit  to  all  concerned  — 
the  employer,  the  employee  and  the  State  Fund.  At  the  same 
time  the  State  Fund  is  always  ready  to  defer  to  the  preferences 
of  employer  or  employee  with  respect  to  the  choice  of  a  physician, 
provided  that  the  service  rendered  is  competent  and  the  charge 
reasonable.  In  the  case  of  the  American  Hard  Rubber  Company, 
the  complications  were  unusually  difficult  and  proved  to  be  impos¬ 
sible  of  mutually  satisfactory  adjustment.  The  letter  quoted  by 
Mr.  Connor  closes  with  an  expression  of  extreme  satisfaction  with 


Answer  to  Report  of  Jeremiah  F.  Connor 


81 


the  service  of  the  company  at  present  carrying  the  insurance.  An 
interesting  side  light  is  thrown  on  this  situation  by  the  announce¬ 
ment  made  to  a  representative  of  the  State  Fund,  who  called  at 
the  office  of  the  American  Hard  Rubber  Company,  that  the  Com¬ 
pany  is  now  dissatisfied  with  the  present  insurance  carrier  and 
intends  to  place  the  insurance  elsewhere  upon  the  expiration  of 
the  policy. 

Analysis  of  Cancellations 

Mr.  Connor  intimates  that  other  employers  in  the  State  Fund 
have  cancelled  their  policies  by  reason  of  dissatisfaction  with  the 
medical  service.  He  states : 

“  During  the  past  year,  the  State  Insurance  Fund  was 
obliged  to  cancel  2,710  policies.  An  analysis  of  the  reason  of 
these  cancellations  would  doubtless  furnish  an  important  com¬ 
mentary  in  relation  to  the  management  of  the  Fund.” 

The  cancellation  of  the  American  Hard  Rubber  Company  is 
the  only  one  known  to  the  management  of  the  State  Fund  that  was 
due  to  a  complaint  concerning  the  medical  service.  An  analysis 
of  the  general  reasons  for  the  cancellation  in  the  case  of  2,710 
policies,  cancelled  in  1918,  shows  that  1,333  were  cancelled 
because  the  employer  had  discontinued  business  and  employed  no 
labor,  or  had  completed  the  operations  covered  by  the  policy;  774 
policies  were  cancelled  by  the  State  Fund  for  non-payment  of 
premium;  310  cancellations  were  due  to  miscellaneous  reasons, 
such  as  self-insurance,  bankruptcy,  removal  from  the  State,  ina¬ 
bility  to  locate  policyholders,  death,  assured  covered  under  another 
State  Fund  policy;  only  293  policies  were  cancelled  because  the 
employer  took  other  insurance. 

It  is  interesting  to  note  here  that  the  new  business  written  by 
the  State  Fund  during  the  year  amounted  to  $188,018.71,  which 
was  over  30  per  cent  more  than  the  amount  of  business  lost  through 
cancellation,  $152,245.  It  is  not  remarkable  that  the  State  Fund 
should  have  lost  some  business  to  the  private  companies  in  1918, 
when  it  is  borne  in  mind  that  no  dividends  had  been  paid  in  the 
general  groups  during  the  years  1916,  1917  and  1918,  and  during 
these  years  its  policyholders  were  persistently  solicited  not  only 
by  the  agents  of  the  stock  companies,  but  by  the  representatives 
of  the  mutual  companies  promising  substantial  dividends.  Under 


82 


State  Insurance  Fund 


the  circumstances,  the  wonder  is  rather  that  the  State  Fund  lost 
so  little  business  to  its  competitors.  Even  the  comparatively  small 
loss  of  old  business  was  more  than  offset  by  the  volume  of  new 
business  written  by  the  State  Fund  in  1918. 

Employment  of  Specialists 
Mr.  Connor  further  states: 

“  The  State  Fund  also  endeavors  to  compel  all  claimants 
to  patronize  certain  specialists.  In  the  case  of  William 
Corcoran,  already  refered  to,  who  was  being  treated  by  a 
specialist  at  the  Manhattan  Eye  and  Ear  Hospital  for  an 
injury  to  an  eye,  the  medical  adviser  of  the  State  Insurance 
Fund  tried  to  compel  the  claimant  to  abandon  this  treatment 
and  patronize  Dr.  Torok.  This  the  claimant  refused  to  do, 
whereupon  the  medical  adviser  made  this  report  on  the  case 
which  appears  in  the  files: 

“  ‘  Inasmuch  as  he  steadfastly  refuses  to  follow  the  treat¬ 
ment  advised  by  this  office,  I  deem  it  wise  to  not  even  examine 
the  eye  in  this  case.  Ho  medical  bills  are  to  be  paid  in  this 
case  outside  of  Dr.  Torok’s  subsequent  to  claimant's  first 
examination  or  visit  to  Dr.  Torek’s  office.’  ” 

The  State  Fund  is  accustomed  to  avail  itself  of  the  services 
of  certain  specialists.  These  specialists  are  all  experts  of  high 
standing  in  the  medical  profession  and  can  challenge  any  criticism 
of  their  work.  The  State  Fund  is  assured  that  claimants  will 
receive  the  best  treatment  at  the  hands  of  these  specialists,  and, 
therefore,  urges  them  to  take  advantage  of  the  opportunity  freely 
offered  them.  In  the  case  of  William  Corcoran,  the  action  taken 
by  the  medical  adviser  of  the  State  Fund  would  appear  to  have 
been  drastic,  but  the  circumstances  in  this  case  were  peculiarly 
irritating.  It  is  unfortunate  that  Dr.  Frederic  A.  Williams, 
medical  adviser  of  the  State  Fund,  who  made  the  report  cited 
by  Mr.  Connor,  has  since  died,  and  a  full  explanation  of  the  pro¬ 
cedure  in  this  case  is,  therefore,  not  obtainable.  It  is  noteworthy 
that  the  final  outcome  of  this  case  was  the  complete  loss  of  vision 
in  the  right  eye.  It  is  the  belief  of  the  claim  auditor  of  the 
State  Fund,  who  was  familiar  with  this  case,  that,  if  the  treat¬ 
ment  recommended  by  the  medical  adviser  has  been  continued, 
a  part  of  the  sight  of  the  eye  might  have  been  saved. 


Answer  to  Report  of  Jeremiah  F.  Connor 


83 


Medical  Examination  of  Claimants 

The  practice  of  the  State  Fund  with  reference  to  medical 
examinations  of  claimants  is  also  criticized  by  Mr.  Connor  as 
follows : 

“  In  a  large  number  of  cases,  the  medical  adviser  of  the 
Fund,  as  soon  as  an  accident  is  reported,  requests  another 
favored  physician  to  visit  and  examine  the  claimant.  This 
doctor  calls  on  the  claimant,  makes  a  more  or  less  superficial 
examination,  directs  the  claimant  to  come  to  the  State  Fund 
for  medical  examination,  and  makes  a  charge  ranging  from 
$5  to  $15  per  visit.  Since  January  the  bills  of  this  physician 
have  been  over  $1,000.  The  work  performed  in  this  respect 
is  wholly  unnecessary  and  is  duplicated  a  few  days  later  by 
the  medical  adviser  of  the  Fund,  who  receives  an  annual 
salary.  The  medical  treatment  rendered  by  the  State  Insur¬ 
ance  Fund  needs  prompt  and  radical  cure.” 

It  is  the  practice  of  the  State  Fund,  upon  the  receipt  of  an 
accident  report,  to  send  a  physician  to  examine  the  injured 
employee  in  serious  cases.  The  purpose  of  the  examination  is 
twofold:  to  obtain  exact  information  regarding  the  nature  of 
the  injury  and  the  probable  duration  of  disability  and  to  enable 
the  medical  adviser  to  see  to  it  that  proper  medical  treatment 
is  provided  for  the  employee.  It  is  impossible  for  the  medical 
adviser  of  the  State  Fund  to  make  such  examinations,  as  his  full 
time  is  needed  for  office  work  and  executive  duties.  It  is  imprac¬ 
ticable  to  bring  all  claimants  to  the  office  for  examination.  Many 
claimants  pay  no  attention  to  a  letter  requesting  a  call  at  the 
office;  others  are  unable  to  call  because  of  their  condition.  In 
order  to  secure  information  needed  by  the  claim  division  and  to 
insure  proper  medical  treatment  for  claimants,  examinations  are 
made  at  the  request  of  the  State  Fund  by  physicians,  who  visit 
claimants  in  their  homes,  report  their  condition,  and  refer  them 
to  the  office  of  the  State  Fund  or  to  dressing  stations  for  further 
examination  and  treatment.  This  practice  is  fully  justified  by 
the  results  and  should  be  extended  rather  than  discontinued  or 
curtailed. 

The  practice  is  a  distinct  benefit  to  employees.  In  many 
instances  the  visit  of  the  examining  physician  results  in  short¬ 
ening  the  period  of  temporary  disability  or  reducing  the  extent 


84 


State  Insurance  Fund 


of  permanent  disability  by  enabling  the  State  Fund  to  prescribe 
proper  medical  or  hospital  treatment,  which  the  claimant  could 
not  otherwise  receive. 

The  usual  fee  for  an  examination  is  $5.  This  is  a  reasonable 
fee  if  competent  service  is  to  be  obtained.  Many  of  the  visits 
are  in  outlying  sections  and  require  considerable  time. 

This  examination  work  is  absolutely  essential  to  effective  direc¬ 
tion  of  the  claim  and  medical  service  of  the  State  Fund.  It  does 
not  duplicate  the  work  of  the  medical  adviser,  but  supplements  it. 
In  the  absence  of  a  salaried  medical  staff  of  the  State  Fund,  the 
only  way  in  which  this  essential  work  can  be  performed  is  through 
physicians  specially  assigned  for  this  purpose.  It  is,  perhaps, 
worth  noting  in  this  connection,  that  the  budget  proposals  of  the 
manager  of  the  State  Fund  for  the  next  fiscal  year  called  for 
the  appointment  of  an  assistant  medical  adviser.  This  provision, 
however,  was  cut  out  by  the  legislative  finance  committee.  In 
the  absence  of  some  provision  in  the  budget,  the  only  way  in 
which  the  important  work  of  making  first  examinations  can  be 
carried  on  is  under  the  present  plan. 

The  “  favored  physician  ”  to  whom  allusion  is  made  in  Mr. 
Connor’s  report,  is  presumably  Dr.  W.  Knowlton,  who  had 
been  called  upon  to  make  many  examinations  for  the  State  Fund. 
This  physician  is  thoroughly  competent  and  has  performed  the 
work  assigned  to  him  in  a  conscientious  and  painstaking  manner. 
The  amount  received  by  him  for  his  services  is  not  excessive. 

Conclusion 

The  criticisms  of  Mr.  Connor  with  respect  to  the  collection  of 
premiums  by  the  State  Fund,  the  individual  or  special  groups, 
the  Wynkoop  Service,  the  treatment  of  claimants  and  the  medical 
question  have  been  reviewed  and  discussed  in  detail.  It  now 
remains  to  comment  briefly  upon  some  of  the  statements  regarding 
miscellaneous  matters. 


Volume  of  Business 

With  reference  to  the  volume  of  business  carried  by  the  State 
Fund,  Mr.  Connor  makes  the  disparaging  comment  that  as  50 
per  cent  of  the  business,  according  to  the  manager,  is  carried  in 


Answer  to  Report  of  Jeremiah  F.  Connor 


85 


special  groups  “  the  State  Fund  generally  carries  only  about  8 
per  cent  of  the  compensation  insurance  of  the  State.” 

It  is  true  that  nearly  50  per  cent  of  the  business  of  the  State 
Fund  is  carried  in  special  groups,  and  it  is  also  true  that  this 
business  could  not  have  been  secured  and  retained  in  any  other 
way.  If  the  special  groups  were  abolished  —  and  the  severe 
criticism  of  these  groups  in  Mr.  Connor’s  report  would  seem  to 
indicate  an  opinion  on  his  part  that  they  should  be  abolished  — 
this  would  be  equivalent  to  an  invitation  to  the  employers  in  such 
groups  to  withdraw  from  the  fund. 

Question  of  Dividends 

With  respect  to  dividends  in  the  general  groups,  Mr.  Connor 
declares : 

“As  a  matter  of  fact,  the  State  Fund  could  declare  addi¬ 
tional  dividends  in  favor  of  the  employers  in  general  groups 
to  the  extent  of  a  million  dollars,  in  addition  to  the  10  per 
cent  dividend  above  mentioned  and  still  be  solvent  beyond 
a  question  of  a  doubt.” 

Mr.  Connor  does  not  explain  where  the  million  dollars  could 
be  found.  To  be  sure,  he  refers  to  certain  reserves  now  carried 
by  the  State  Fund  amounting  to  $870,394.25,  which  he  terms 
unnecessary.  The  necessity  or  the  desirability  of  these  reserves 
has  been  previously  explained.  The  reserve  for  deferred  claim 
expenses  is  required  according  to  the  rules  of  the  State  Insurance 
Department  in  the  case  of  mutual  companies.  The  remaining 
reserves,  for  experience  fluctuation,  securities  fluctuation,  and 
unassigned  surplus,  account  for  only  $600,000  of  Mr.  Connor’s 
million. 

If  the  State  Fund  should  declare  additional  dividends  of  a 
million  dollars  to  employers  in  the  general  groups  at  this  time, 
and  were  then  subjected  to  examination  by  the  State  Insurance 
Department,  it  would  hardly  be  found  “  solvent  beyond  the  ques¬ 
tion  of  a  doubt.”  As  a  matter  of  fact,  additional  dividends  in 
three  of  the  general  groups  of  20  per  cent,  10  per  cent,  and  25 
per  cent  respectively,  have  already  been  declared.  The  reasons  for 
the  first  declaration  of  a  provisional  dividend  of  only  10  per  cent. 


86 


State  Insurance  Fund 


in  the  general  groups,  and  a  later  declaration  of  supplementary 
dividends  of  higher  percentage  in  three  of  these  groups,  have  been 
fully  explained  in  a  preceding  section.  In  brief,  the  first  divi¬ 
dend  was  limited  to  10  per  cent,  in  view  of  the  uncertainty  of  the 
business  outlook  at  the  close  of  the  year  and  the  impossibility  of 
determining  the  exact  percentages  of  surplus  earnings  in  different 
groups  immediately  after  the  end  of  the  last  policy  period.  When 
the  industrial  situation  developed  favorably  and  the  experience  of 
the  different  groups  was  definitely  determined,  additional  divi¬ 
dends  were  declared  to  a  reasonable  amount.  The  management  of 
the  State  Fund  would  have  laid  itself  open  to  severe  criticism  if, 
after  only  one  year  of  favorable  experience  following  upon  the 
heavy  losses  in  the  lean  years  of  1916  and  1917,  a  dividend  distri¬ 
bution  of  a  million  dollars  in  the  general  groups  had  been  recom¬ 
mended.  Such  a  recommendation  would  have  been  properly  criti¬ 
cised  as  reckless  in  the  extreme  and  would  have  deserved  the  em¬ 
phatic  disapproval  of  the  commission  as  well  as  of  the  policy¬ 
holders. 

Sundry  Comments 

Mr.  Connor  complains  that  his  investigation  “  has  been  made 
with  little  co-operation  from  the  management  of  the  State  In¬ 
surance  Fund.”  This  statement  is  most  unfair.  At  the  begin¬ 
ning  of  the  investigation,  the  manager  of  the  State  Fund  assured 
Mr.  Connor  that  he  would  have  full  co-operation  in  conducting  his 
inquiry,  and  that  any  requests  from  him  for  data,  reports  or  infor¬ 
mation  from  the  records  would  receive  prompt  and  careful  atten¬ 
tion.  In  the  early  days  of  the  investigation,  Mr.  Connor  availed 
himself  to  some  extent  of  the  co-operation  thus  offered.  But  later, 
he  resorted  to  other  methods  for  obtaining  information.  It  is  to  be 
regretted  that  Mr.  Connor  did  not  continue  to  make  use  of  the 
co-operation  of  the  State  Fund  management  throughout  the  course 
of  his  investigation. 

Mr.  Connor  continues :  “It  has  been  suggested  to  me  that  no 
matter  how  bad  the  conditions  are  in  the  State  Fund,  they  should 
receive  no  public  attention  because  it  might  result  in  the  State 
Fund  losing  some  of  its  business.  When  it  is  generally  known 
that  the  employers  in  the  State  Fund,  besides  having  ratings  from 
14  per  cent,  to  15  per  cent,  lower  at  the  start,  are  now  entitled  to 


Answer  to  Report  of  Jeremiah  F.  Connor 


87 


a  dividend  of  at  least  33%  per  cent,  those  now  in  the  State  Fund 
will  not  seek  other  insurance.’7 

It  is  unfortunately  true  that  public  criticism  of  the  State  Fund 
inevitably  results  in  the  loss  of  business,  for  statements  reflecting 
upon  its  condition  or  its  management  are  eagerly  seized  upon  by 
its  competitors  and  used  in  the  solicitation  of  business.  Even 
when  such  criticism  is  shown  to  be  not  well  founded,  the  correc¬ 
tion  never  overtakes  the  criticism,  which  is  circulated  widely 
among  employers  by  the  thousand  of  representatives  of  the  casu¬ 
alty  companies.  The  simple  question  whether  the  investigation 
and  report  by  Mr.  Connor  will  help  or  hurt  the  State  Fund  in  this 
respect  can  be  answered  in  only  one  way  by  a  person  familiar 
with  the  competitive  conditions  in  the  compensation  insurance 
field.  A  printed  abstract  of  Mr.  Connor’s  report  under  the  head¬ 
line  “  State  Fund  Scored  ”  has  already  been  issued  by  one  of  the 
mutual  companies. 

Mr.  Connor  expresses  the  opinion  that  “  if  the  State  Fund  had 
been  properly  handled  from  the  start,  it  would  now  be  writing 
from  25  per  cent,  to  50  per  cent,  of  all  the  compensation  insur¬ 
ance  in  the  State.” 

It  is  to.  be  feared  that  if  the  policies  with  respect  to  reserves 
and  dividends  and  groups  which  Mr.  Connor’s  report  appears  to 
suggest  or  sanction  had  been  adopted  in  the  beginning,  the  State 
Fund  would  be  to-day  insolvent,  and  would  be  carrying  only  a 
very  small  percentage  of  the  compensation  business  of  the  State. 
It  has  been  a  hard  task  to  build  up  the  present  volume  of  business. 
It  would  be  an  easy  matter  to  drive  the  bulk  of  this  business  out 
of  the  State  Fund  by  injudicious  interference  with  the  policies 
which  have  enabled  the  State  Fund  to  secure  and  retain  it  in  the 
past. 

Activities  of  Brokers  and  Agents 

The  main  reason  why  the  State  Fund  has  not  obtained  a  larger 
proportion  of  the  business  is  to  be  found  in  the  activities  of  the 
brokers  and  agents  of  the  casualty  companies.  There  are  about 
12,000  insurance  brokers  and  agents  in  this  State,  and  with  rare 
exceptions, —  so  few  as  to  be  practically  negligible, —  these  repre¬ 
sentatives  of  the  private  insurance  companies  industriously  dis¬ 
seminate  all  sorts  of  misinformation  and  misrepresentation  con- 


88 


State  Insurance  Fund 


cerning  the  State  Fund.  The  average  employer  relies  upon  his 
insurance  broker  for  advice  about  all  insurance  matters.  He 
needs  various  kinds  of  insurance  aside  from  workmen’s  compen¬ 
sation  —  fire,  theft,  elevator,  boiler,  teams,  automobile  and  public 
liability.  The  usual  practice  is  to  turn  over  all  this  insurance  to 
be  placed  through  a  broker.  Insurance  brokers  get  no  commis¬ 
sions  from  the  State  Fund,  and,  consequently,  are  interested  to 
keep  business  away  from  it  and  to  discredit  it  in  every  possible 
way. 

Moreover,  there  seems  to  be  no  standard  of  fair  play  on  the 
part  of  the  fraternity  of  insurance  brokers  and  agents  in  their 
competitive  tactics  toward  the  State  Fund.  In  general,  they  are 
unscrupulous  in  their  misrepresentations  about  the  State  Fund 
insurance.  Although  the  State  Fund  offers  complete  security  at 
minimum  cost,  employers  are  led  to  believe  that  insurance  in  the 
State  Fund  is  both  insecure  and  expensive.  Employers  are  told 
that  the  State  Fund  maintains  no  reserves  ;  that  its  surplus  is 
exhausted;  that  it  is  bankrupt  or  about  to  become  so;  that  its 
policyholders  are  leaving  it ;  that  its  policy  affords  no  protection ; 
that  it  gives  no  service;  that  it  charges  the  same  rates  as  the  old 
line  companies;  that  its  policyholders  are  liable  to  assessment, 
and  so  on,  ad  libitum.  The  State  Fund  is  unable  in  most  cases  to 
correct  these  misrepresentations  and  to  place  the  facts  regarding- 
its  terms  of  insurance,  its  service,  and  its  financial  condition 
before  employers,  as  it  has  not  the  facilities  for  reaching  them  at 
first  hand. 

Another  Charge  of  Favoritism 

Mr.  Connor  also  charges  favoritism  in  fixing  the  premiums. 
For  example,  he  states:  “A  number  of  firms  engaged  in  house 
wrecking  are  insured  in  the  State  Fund  and  one  of  these,  The 
Hh  in  frank  House  Wrecking  Company,  is  permitted  to  pay  a  pre¬ 
mium  more  than  50  per  cent,  less  than  the  others.” 

This  company  has  been  insured  in  the  State  Fund  from  the 
beginning.  When  the  rates  were  advanced,  January  1,  191Y,  the 
rates  previously  in  force  were  retained  for  certain  classifications 
and  risks  for  which  the  experience  had  proved  these  rates  to  be 
adequate.  The  housewrecking  concern  in  question  has  been  car¬ 
ried  profitably  at  the  old  rates.  The  experience  of  this  risk  to 
December  31,  1918,  shows  earned  premiums  of  $12,206.86,  and 


Answer  to  Report  of  Jeremiah  F.  Connor 


89 


incurred  losses  of  $1,577.96,  or  a  loss  ratio  of  about  13  per  cent. 
The  experience  of  other  housewrecking  risks  insured  in  the 
State  Fund  showed  premiums  to  date  $67,075.22  and  incurred 
losses  of  $72,948.42,  or  a  loss  ratio  of  over  100  per  cent. 

Previous  Investigations 

The  concluding  paragraph  of  Mr.  Connor’s  report  reads  as 
follows : 

“  What  I  have  discovered  is  only  a  scratch  on  the  surface. 
The  State  Fund  has  never  been  properly  audited  by  an  out¬ 
side  actuary  or  accountant  since  first  constituted.  I  recom¬ 
mend  that  the  whole  State  Fund  be  investigated  from  start 
to  finish  by  a  competent  actuarial  accountant.” 

With  reference  to  Mr.  Connor’s  statement  that  the  State  Fund 
has  never  been  properly  audited  by  an  outside  actuary  or  ac¬ 
countant,  it  should  be  recorded  that  the  State  Fund  was  examined 
and  audited  in  1917  by  the  State  Insurance  Deparment,  which  is 
authorized  by  law  “  to  examine  into  the  condition  of  the  State 
Fund  at  any  time.”  The  report  of  this  examination  was  issued 
as  a  public  document.  Incidentally,  it  may  be  remarked  that  the 
State  Fund  has  been  investigated  three  times,  in  addition  to  the 
examination  by  the  State  Insurance  Department  and  the  investi¬ 
gation  by  Mr.  Connor.  These  investigations  were  made  by  the 
State  Comptroller’s  office,  by  the  Legislative  Civil  Service  Com¬ 
mittee,  and  by  the  Re w  York  Bureau  of  Municipal  Research. 
It  may  be  said  with  truth  that  the  life  of  the  State  Fund  has 
been  just  one  investigation  after  another.  The  report  of  each  of 
these  investigations,  prior  to  the  last,  was  generally  favorable  and 
commendatory. 

Another  investigation  of  the  State  Fund  “  from  start  to  finish 
by  a  competent  actuarial  accountant  ”  is  now  recommended  by 
Mr.  Connor.  Such  an  investigation  would  be  welcome  by  the 
management  of  the  State  Fund. 

A  Summary  with  Comments. 

Mr.  Connor’s  report  might  be  characterized  not  unfairly  as 
critical  and  negative.  It  is  lacking  in  positive  and  constructive 
suggestions.  It  may  be  of  interest  to  marshal  such  suggestions 


90 


State  Insurance  Fund 


or  recommendations  as  are  expressed  or  implied  in  the  report. 
The  summary  would  run  about  as  follows: 

Declare  additional  dividends  of  one  million  dollars  in  the 
general  groups. 

(This  would  impair  the  financial  stability,  if  not  endanger  the 
actual  solvency  of  the  State  Fund.) 

Expedite  the  collection  of  premiums. 

(The  need  of  additional  employees  for  this  purpose  has  been 
urged  repeatedly  by  the  manager  of  the  State  Fund.) 

Curtail  the  dividends  in  the  special  groups,  and  preferably 
abolish  such  groups. 

(This  would  force  the  withdrawal  of  employers  in  such  groups 
which  represent  nearly  one-half  of  the  premium  income  of  the 
State  Fund.) 

Abolish  the  special  group  for  employers  using  the  Wynkoop 
Service  and  refuse  to  do  business  with  the  latter. 

(This  would  result  in  the  loss  of  desirable  accounts  amounting 
to  over  $100,000.) 

Expedite  the  settlement  of  claims  and  pay  one  hundred  cents 
on  the  dollar  to  every  claimant. 

(This  is  the  present  policy  of  the  State  Fund.) 

Stop  sending  employees  to  State  Fund  dressing  stations. 

(These  dressing  stations  are  rendering  satisfactory  service  at 
low  cost.) 

Discontinue  the  practice  of  examining  claimants  outside  the 
office  through  physicians  assigned  to  this  work. 

(These  examinations  are  absolutely  essential  to  the  proper  con¬ 
duct  of  the  work  of  the  claim  and  medical  divisions  of  the  State 
Fund.) 

Let  the  State  Fund  be  investigated  again  by  a  competent  actu¬ 
arial  accountant.) 

(While  such  an  investigation  would  be  welcomed,  it  should  not 
be  forgotten  that  an  investigation  necessarily  hampers  greatly  the 
work  of  the  office,  already  handicapped  by  lack  of  adequate  force.) 

Real  Needs  of  State  Fund 

In  conclusion,  it  may  be  pointed  out  that  there  is  no  mention  in 
Mr.  Connor’s  report  of  certain  difficulties  under  which  the  State 
Fund  now  labors.  He  criticises  the  State  Fund  for  its  failure 


Answer  to  Report  of  Jeremiah  F.  Connor 


91 


to  secure  a  larger  volume  of  business,  but  he  says  nothing  about 
the  real  obstacles  which  impede  the  progress  of  the  State  Fund. 

Mr.  Connor  does  not  refer  to  the  grave  evil  of  the  practice  on 
the  part  of  insurance  brokers  and  agents  of  circulating  gross  mis¬ 
statements  concerning  the  State  Fund. 

A  serious  handicap  of  the  State  Fund,  which  received  no  men¬ 
tion  in  Mr.  Connor’s  report,  is  the  difficulty  of  satisfying  employ¬ 
ers  as  to  the  protection  under  the  State  Fund  policy  on  account  of 
the  limitation  of  the  coverance  to  liability  under  the  Workmen’s 
Compensation  Law  only.  This  limitation  is  a  severe  discrimina¬ 
tion  against  the  State  Fund  in  competition  with  the  stock  and 
mutual  companies.  It  is  true  that  the  liability  under  the  Work¬ 
men’s  Compensation  Law  is  exclusive  for  an  employer  carrying 
on  a  hazardous  employment  within  the  State  and  not  subject  in 
any  way  to  the  jurisdiction  of  the  federal  statutes  or  the  laws  of 
other  states.  But  liability  may  arise  under  the  laws  of  other 
states  in  connection  with  traveling  salesmen,  and  liability  at  ad¬ 
miralty  may  arise  through  the  operation  of  some  vessel,  which 
could  not  be  covered  specifically  by  the  State  Fund  policy.  Many 
employers  desiring  to  insure  in  the  State  Fund  are  deterred  from 
doing  so  through  the  apprehension  that  some  action  for  damages 
may  be  successfully  maintained  by  an  injured  employee.  Repre¬ 
sentatives  of  the  casualty  companies  make  effective  use  of  the 
argument  that  the  State  Fund  cannot  cover  liability  outside  the 
Workmen’s  Compensation  Law.  Even  when  all  the  operations  of 
an  employer  are  clearly  within  the  scope  of  the  law,  he  may,  nev¬ 
ertheless,  be  disturbed  by  the  fear  of  a  suit  on  some  liability  not 
covered  by  the  law.  The  State  Fund  will  always  be  at  a  great 
disadvantage  in  this  respect  until  it  is  authorized  by  law  to  issue 
a  policy  covering  any  collateral  liability  at  common  law,  under 
the  federal  statutes,  or  under  the  laws  of  other  states,  which  may 
arise  in  connection  with  a  workmen’s  compensation  risk. 

Another  handicap  of  the  State  Fund  is  the  difficulty  of  con¬ 
ducting  a  competitive  business  enterprise  under  the  present  rigid 
restrictions  of  the  budgetary  system.  The  method  by  which  the 
State  Fund  is  financed  out  of  a  legislative  appropriation  is  cum¬ 
bersome  and  unbusinesslike.  The  budget  of  the  State  Fund  must 
be  prepared  months  in  advance  of  the  beginning  of  the  fiscal  year 


92 


State  Insurance  Fund 


and  no  departure  from  the  narrow  limits  of  the  budget  is  per-  i 
mitted,  to  meet  any  emergency  however  urgent.  Ho  business  can  ; 
be  conducted  with  the  highest  degree  of  economy  and  efficiency  I 
under  such  a  fiscal  regime.  The  State  Fund,  it  should  be  recog-  j 
nized,  differs  from  the  ordinary  State  department  in  two  impor¬ 
tant  respects:  it  is  subject,  to  a  competitive  check  on  expendi¬ 
tures,  which  must  be  kept  within  proper  limits  if  the  business  is 
to  survive  and  develop,  and  it  is  wholly  self-sustaining,  all  ex¬ 
penses  being  paid  by  the  policyholders  and  not  by  the  taxpayers 
at  large.  The  State  Fund,  therefore,  should  not  be  subjected  j 
unconditionally  to  the  restrictions  of  a  fiscal  scheme  designed  for 
non-competitive,  tax-supported  State  departments. 

The  enactment  of  legislation  to  relieve  the  State  Fund  of  these  I 
handicaps  would  do  much  toward  enabling  it  to  obtain  the  25  per 
cent,  to  50  per  cent,  share  of  the  compensation  insurance  in  the 
State,  which  Mr.  Connor  thinks  that  it  ought  to  have  secured; 
while  compliance  with  the  suggestions  expressed  or  implied  in 
his  report  would,  it  is  to  be  feared,  result  in  the  withdrawal  of 
25  per  cent,  to  50  per  cent,  of  the  business  now  insured  in  the 
State  Fund.  Respectfully  submitted, 

(Signed)  F.  Spencer  Baldwin, 

Manager  State  Insurance  Fund . 


Answer  to  Report  of  Jeremiah  F.  Connor 


93 


APPENDIX 


I.  Memorandum  In  re  Reserves  Held  December  31,  1918 
In  accordance  with  your  request,  I  am  pleased  to  give  you  the 
following  information  with  respect  to  the  several  reserves  held 
on  December  31,  1918,  as  noted  in  my  report  dated  February  5, 

1919: 

I.  Loss  Reserve. —  This  amounted  to  $3,316,116.40,  and  cov¬ 


ered  the  anticipated  future  payments  on  account  of  accidents 
which  had  occurred  prior  to  December  31,  1918,  which  were  not 
fully  closed  out.  These  deferred  payments  fall  under  five  heads : 

1.  Payments  to  beneficiaries  in  death  cases 

and  funeral  benefits  in  recent  death 

cases  where  there  were  no  beneficiaries  $1,764,006  10 

2.  Future  payments  to  injured  employees 

permanently  and  totally  disabled.  .  .  .  254,612  51 

3.  Deferred  payments  to  injured  employees 

on  account  of  permanent  partial  dis¬ 
ability  .  492,520  53 

4.  Deferred  payments  on  account  of  tempo¬ 

rary  total  disability  cases  presumed 

not  to  be  permanently  disabled .  659,736  92 

5.  Probable  future  expenditures  for  med¬ 

ical  aid  under  past  accidents .  145,240  34 


Total  reserve  .  $3,316,116  40 


The  following  is  the  explanation  of  the  way  the  amount  of 
reserve  was  arrived  at  under  each  of  these  items : 

1.  Death  Cases. —  This  represents  the  present  value  in  such 
cases  based  upon  the  Survivorship  Annuitants’  Mortality  Table 
and  the  Remarriage  Table  of  the  Dutch  Royal  Insurance  Insti¬ 
tution,  assuming  interest  at  3%  per  cent.  The  benefits  in  case 
of  death,  to  the  widow,  continue  for  life  during  widowhood,  with 


94 


State  Insurance  Fund 


a  provision  for  two  years’  compensation  in  a  lump  sum  on  remar¬ 
riage,  and  to  minor  children  until  age  of  18  is  reached.  The 
benefits  to  other  dependents  continue  during  life  and  dependency, 
which  theoretically  may  terminate  prior  to  death,  but  in  actual 
practice  rarely,  if  ever,  does.  It  is  obvious  that  the  present  value 
of  these  cases  should  be  determined  on  the  basis  of  a  suitable 
mortality  table  and  some  statistical  table  giving  probabilities  of 
remarriage.  The  tables  used  in  this  case,  as  also  the  rate  of 
interest,  have  received  legislative  sanction  through  embodiment 
into  the  statute  as  the  basis  of  commutation  of  cases  to  be  paid 
into  the  aggregate  trust  fund.  Of  course,  no  one  can  say  with 
assurance  that  the  probabilities  of  death  and  remarriage  shown 
by  these  tables  will  actually  be  accurately  realized  in  American 
experience.  Up  to  the  present  time,  however,  we  have  no  more 
dependable  tables  to  use,  and  sufficient  experience  has  not  devel¬ 
oped  to  form  the  basis  of  an  American  table.  It  is  my  expecta¬ 
tion  during  the  coming  year  to  further  investigate  this  matter, 
and  I  hope  that  we  may  in  the  near  future,  with  the  co-operation 
of  the  Insurance  Department  and  the  Commission,  make  some 
investigation  which  may  lead  to  the  development  of  distinctly 
American  experience  tables.  I  believe  the  above  reserve  is  prob¬ 
ably  adequate,  and  there  is  no  reason  for  believing  that  it  is 
excessive.  Of  course,  if  we  have  sufficient  facilities  the  claim 
department  can  investigate  these  cases,  and  it  may  be  found  that 
some  widows  have  remarried,  and  the  cases  may,  therefore, 
require  a  less  reserve  than  has  been  set  up;  but  the  reserve  at 
any  time  can  only  be  set  up  on  the  basis  of  facts  as  known  at  that 
time. 

2.  Permanent  Total  Disability . —  The  compensation  to  an 
employee  sustaining  a  total  permanent  disability  is  likewise  a 
life  pension  and  must  be  valued  upon  the  basis  of  a  mortality 
table.  The  Survivorship  Annuitants’  Mortality  Table  has  been 
used  in  this  case  also  and  the  same  rate  of  interest,  3%  per  cent, 
has  been  used.  In  this  connection,  if  you  will  refer  to  the  table 
on  page  9  of  my  report,  you  will  see  that  it  is  hardly  safe  to 
assume  a  higher  rate  of  interest. 

3.  Permanent  Partial  Disability. —  The  law  prescribes  a  fixed 
compensation  for  a  definite  term  in  the  case  of  permanent  partial 


Answer  to  Report  of  Jeremiah  F.  Connor 


95 


disability,  and  the  reserve  has  been  set  up  in  those  cases  at  the 
amount  of  the  fixed  compensation  less  actual  payments  made. 
Of  course,  we  have  had  to  use  some  discretion  in  this  item  where 
cases  had  not  yet  been  definitely  awarded  permanent  partial 
compensation,  but  where  the  facts  indicated  such  award  was 
probable. 

4.  Temporary  Total  Disability. —  The  reserve  in  this  case  is 
in  accordance  with  the  table  prepared  by  Mr.  Woodward  and 
approved  by  the  Superintendent  of  Insurance.  This  table  is  not 
the  same  one  as  used  by  mutual  companies,  for  the  reason  that 
they  do  not  make  up  their  reserve  until  after  the  expiration  of  a 
month  following  the  end  of  the  year,  when  their  knowledge  of 
cases  is  more  complete  than  is  ours  at  the  time  our  reserves  are 
made  up.  In  the  natural  run  of  things,  a  certain  proportion  of 
the  cases  open  on  December  31st  are  closed  within  one  month  of 
that  time.  Therefore  the  values  in  our  table  are  somewhat 
smaller  than  those  in  the  Mutual  Company  table.  The  aggregate 
result  is  probably  substantially  the  same. 

5.  Medical  Aid. —  This  is  based  upon  taking  an  average  per 
case  where  our  accident  record  cards  do  not  show  that  the  medical 
expense  has  been  entirely  liquidated. 

If  there  is  any  question  as  to  the  sufficiency  or  excess  in  the 
reserves,  it  must  be  with  respect  to  the  last  two  items,  which  relate 
almost  wholly  to  cases  arising  during  the  last  calendar  year  and 
largely  to  cases  arising  during  the  last  policy  period  of  six  months. 
For  example,  of  the  reserve  for  temporary  total,  amounting  to 
$659,736.92,  $532,214.26  was  in  respect  of  cases  occurring  during 
the  last  policy  period  and  $67,012.66  during  the  policy  period 
immediately  preceding,  at  total  of  over  $599,000  during  the  last 
calendar  year  and  less  than  $60,000  for  the  entire  preceding  time, 
of  which  $57,000  was  for  twenty-one  serious  cases  arising  during 
the  seventh  period;  that  is,  the  last  half  of  1917.  Naturally,  the 
cases  in  the  latest  period  are  those  about  which  least  is  known, 
and  which  are,  therefore,  most  liable  to  adverse  development. 
There  are  also  more  such  cases.  As  the  periods  become  older  and 
the  cases  become  better  known,  we  are  able  to  fix  a  more  accurate 
reserve,  and  the  excess  reserve,  if  any  has  been  held,  is  imme¬ 
diately  freed  for  surplus. 


96 


State  Insurance  Fund 


Of  the  reserve  for  medical  expense,  amounting  to  $145,240.34, 
$84,231.57  was  for  cases  arising  in  the  last  policy  period  of  six 
months  and  $61,008.77  for  cases  arising  during  the  preceding 
six  months,  the  entire  amount,  therefore,  being  for  cases  arising 
during  the  last  calendar  year. 

You  will  note  from  page  2  of  my  report,  under  the  discussion 
of  this  item,  that  the  increase  in  reserve  for  the  last  policy  period 
was  approximately  $150,000,  and  was  due  to  the  conflicting  opera¬ 
tion  of  two  causes  —  reserve  on  account  of  accidents  arising  in 
that  period  and  reserve  released  by  a  re-estimation  of  the  earlier 
periods.  The  incurred  losses  of  the  ninth  period  were  $1,034,799, 
approximately  $100,000  less  than  for  the  eighth  period  and 
$200,000  less  than  for  the  seventh  period.  The  payments  during 
the  period  on  account  of  accidents  occurring  during  that  period 
and  preceding  periods  amounted  to  $680,230,  leaving  a  net  excess 
of  the  incurred  losses  of  the  period  over  the  total  payments  for  the 
period  of  $354,569.  The  amount  of  reserve  released  by  a  revalua¬ 
tion  of  the  preceding  periods  was  $204,810,  of  which  $112,916 
was  oh  account  of  revaluation  of  the  eighth  or  last  period  and 
$82,141  of  the  seventh  period.  There  was  a  very  slight  release 
indicated  on  accidents  occurring  in  the  fifth  and  sixth  periods, 
which  were  almost  wholly  compensated  by  necessary  slight 
increases  in  reserves  on  account  of  accidents  occurring  in  earlier 
periods.  This  result  is  consistent  with  the  revaluation  of  earlier 
periods  on  June  30,  1918,  and  December  31,  1917,  and,  it  seems 
to  me,  indicates  that  our  reserve  rules  are  upon  a  very  sound 
basis.  The  only  cases  of  which  we  have  really  precise  knowledge 
are  valued  upon  standards  which,  as  the  cases  grow  older  and  are 
settled,  prove  accurate  to  a  remarkable  degree.  The  more  recent 
cases  are  valued  upon  a  conservative  basis  so  adjusted  that  if  the 
estimate  has  proven  too  conservative  it  would  promptly  be  released 
on  the  next  valuation,  and  in  any  event  will  not  be  held  beyond 
one  year  from  the  time  of  original  valuation.  It  seems  not 
unlikely  that  on  revaluation  June  3'0th  the  record  as  of  Decem¬ 
ber  31st  will  be  repeated  and  there  will  be  released  for  surplus 
a  small  amount,  less,  however,  than  10  per  cent  of  the  total  reserve 
on  December  31st. 

It  requires  but  little  study  of  the  history  of  liability  and  com¬ 
pensation,  less  reserves,  to  convince  any  one  that  the  tendency  in 


Answer  to  Report  of  Jeremiaii  F.  Connor  97 

the  past  in  this  respect  has  been  viciously  to  underestimate  reserve 
liabilities,  and,  in  view  of  that  tendency  and  fact,  most  conserva¬ 
tive  students  would  view  with  not  a  little  suspicion  the  reserve 
which  upon  successive  revaluations  showed  so  slight  a  margin 
as  10  per  cent.  From  having  made  a  careful  study  of  the  State 
Fund’s  reserves  over  its  entire  history  I  am  fully  satisfied  that 
it  can  safely  operate  in  its  reserve  system.  I  very  gravely  ques¬ 
tion  whether  it  can  operate  with  safety  upon  a  system  which  did 
not  have  this  tendency,  and  you  will  recall  that  an  unfortunate 
error  made  in  one  earlier  valuation  of  the  fund  resulted  in  a 
deficiency  of  reserve  of  more  than  this  amount,  which  ultimately 
had  to  be  made  up  from  the  future  earnings  of  a  period  when, 
due  to  other  conditions,  it  was  exceedingly  difficult  and  unfor¬ 
tunate  for  the  State  Fund  to  have  to  do  this. 

II.  Deferred  Claim  Expense.—  This  item  is  4  per  cent  of  the 
loss  reserve,  being  the  same  percentage  that  is  required  under  the 
rules  for  depositing  with  the  aggregate  trust  fund  to  cover  the 
expenses  of  operating  the  trust  fund.  It  is  for  the  purpose  of 
meeting  the  current  running  expense  of  paying  these  claims.  It 
is  true  that  this  expense  comes  out  of  our  annual  appropriation, 
and  that  if  the  State  Fund  never  has  to  liquidate  it  will  not  have 
to  call  upon  this  fund,  as  such,  to  pay  out  these  cases.  It  seems 
to  me,  however,  that  this  is  not  the  only  or  controlling  reason 
which  should  govern  the  treatment  of  this  item  in  the  State  Fund 
balance  sheet.  Under  the  statute,  the  State  Fund  is  subject  to 
the  supervision  of  the  Insurance  Department  as  respects  its 
solvency  and  will  be  expected  by  that  department  to  meet  the 
tests  required  of  its  competitors.  While  the  Superintendent  of 
Insurance  might  not  attempt  to  prohibit  the  State  'Fund  from 
operating,  if  it  could  not  meet  this  test,  the  intimation  from  his 
office  that  it  did  not  meet  it  would  be  a  most  fatal  blow  to  the 
fund  in  its  competitive  existence.  Therefore,  whether  or  not  the 
State  Fund  is  liable  ever  to  have  to  liquidate,  it  is  as  a  business 
proposition  highly  advisable  for  it,  if  it  can,  to  maintain  reserves 
at  least  equal  to  those  required  by  the  Superintendent  of  Insure 
ance  of  its  competitive  mutual  companies.  In  this  respect  the 
fund  is  in  a  very  different  position  than  if  it  were  operating  as  a 
monopoly.  It  is  true  that  the  superintendent’s  requirement  of 


4 


98 


State  Insurance  Fund 


mutual  companies  is  but  3  per  cent  of  their  reserve,  whereas  the 
reserve  we  have  set  up  is  4  per  cent,  which  makes  a  difference  in 
actual  money  of  about  $30,000.  I  will  discuss  this  a  little 
further  later. 

But  there  is  another  reason  why  it  seems  to  me  highly  desirable 
for  the  State  Fund  to  maintain  this  reserve.  Although  the 
expenses  of  the  State  Fund  are  paid  initially  out  of  an  appro¬ 
priation  of  the  Legislature,  that  appropriation  is  reimbursed  into 
the  State  treasury  out  of  the  premium  income  of  the  State  Fund; 
that  is,  the  policyholders  are  charged  with  the  State  Fund’s 
expenses.  If  this  reserve  is  set  up  on  an  adequate  basis  and  the 
expense  ratio  of  the  State  Fund  is  computed  upon  the  basis  of 
incurred  expenses  ;  that  is,  of  payments  plus  increase  in  outstand¬ 
ings,  then  the  policyholders  of  each  period  pay  all  of  the  expenses 
of  liquidating  the  claims  which  arise  during  that  period  and  of 
maintaining  the  State  Fund  during  that  period.  This  is  as  it 
should  be.  If  these  reserves  are  not  set  up  and  policyholders 
are  charged  for  expenses  only  on  the  basis  of  expenses  paid,  then 
each  succeeding  period  of  policyholders  leaves  for  future  policy¬ 
holders  to  pay  certain  expenses  in  connection  with  claims  which 
arose  under  their  policies.  If  the  State  Fund’s  premium  income 
continues  uniform  and  its  expenses  otherwise  do  not  increase, 
there  will,  nevertheless,  by  reason  of  a  piling  up  of  deferred  claims 
to  be  handled,  be  a  necessary  increase  in  its  total  expenses  which 
would  show  an  increasing  expense  ratio  for  the  State  Fund.  If 
the  State  Fund  had  a  monopoly  of  the  business,  so  that  its  policy¬ 
holders  each  succeeding  year  were  the  same  body,  this  would  not 
be  injurious  to  the  State  Fund,  nor  could  it  generally  be  con¬ 
sidered  inequitable.  Such  is  not,  however,  the  case.  The  State 
Fund  must  secure  its  business  in  the  keenest  kind  of  competition 
with  stock  and  mutual  companies,  and  a  rising  expense  rate  of 
the  State  Fund,  from  whatever  cause,  would  be  eagerly  seized 
upon  by  its  competitors  and  effectively  used  against  it  in  com¬ 
petition.  Further,  it  would  be  inequitable  to  require  new  policy- 
holders  coming  into  the  State  Fund  to  take  up  burdens  created 
for  them  by  existing  or  former  policyholders,  and  likewise  be 
inequitable  to  permit  policyholders  to  leave  the  fund  for  any  rea¬ 
son  and  leave  these  burdens  to  be  borne  by  others.  Equity  and 


Answer  to  Report  of  Jeremiah  F.  Connor 


99 


business  foresight  in  the  light  of  competitive  conditions,  therefore, 
seem  to  require  that  these  reserves  be  set  up  upon  a  basis  as  nearly 
adequate  to  cover  their  purposes  as  can  be  determined.  It  seems 
to  me  that  the  same  reasons  calling  for  a  4  per  cent  loading  in 
the  case  of  deposits  into  the  aggregate  trust  fund  justify  the  4  per 
cent  reserve  in  this  case. 

III.  Premium  Reserve. —  This  reserve  represents  the  unearned 
portion  of  premiums  actually  received  and  probably  calls  for  no 
further  comment. 

IV.  Reserve  for  Industrial  Commission  Expenses  ( Section  77). 
—  This  reserve  represents  two  items  —  an  anticipation  of  the 
amount  shortly  to  be  billed  for  the  Commission’s  year  from  July  1, 
1917,  to  June  30,  1918,  and  a  reasonable  estimate  of  the  same 
item  for  the  remainder  of  the  calendar  year  1918.  These  are 
immediate  liabilities  which  the  State  Fund  must  be  prepared  to 
meet  when  the  bills  are  presented.  In  addition  to  this,  there  is 
also  reserved  4%  per  cent  of  the  loss  reserve,  deducting  the  reserve 
for  medical  payments.  The  last  assessment  for  the  expenses  of 
the  Commission  was  at  4^4  per  cent  of  the  payments,  excluding 
medical  payments,  and  inquiry  from  Mr.  McDermott  indicates 
that  the  assessment  for  the  fiscal  year  ending  June  30,  1917,  will 
be  at  about  the  same  rate.  The  same  reasons  for  setting  up  the 
deferred  claim  expense  reserve  would  seem  to  entirly  justify  and, 
indeed,  require  the  treatment  of  this  item  along  the  same  lines. 

V.  Accrued  Administration  Expense. —  The  State  Fund  has 
not  yet  been  billed  by  the  State  Treasurer  for  its  expenses  for 
the  fiscal  year  ending  June  30,  1918.  Mr.  Fondiller  was  informed 
some  time  ago  from  Mr.  McDermott’s  office  that  these  amounted 
to  $168,559.47,  and  we  have  added  for  the  remaining  six  months 
of  1918  $85,000  (substantially  half  that)  to  make  up  this  item 
of  liability.  I  have  since  been  advised  that  Mr.  McDermott  holds 
that  he  told  Mr.  Fondiller  at  the  time  that  this  $168,559.47  did 
not  include  certain  expenses,  and  he  now  makes  the  figure  sub¬ 
stantially  $20,000  greater.  If  this  be  the  case,  and  the  rate  of 
expense  for  the  last  half  of  1918  is  upon  the  same  basis,  this 
item  would  require  to  be  increased  by  some  $30,000. 

VI.  Reserve  for  Investment  Depreciation. —  As  of  December 
31,  1918,  the  Special  Committee  on  Securities  Valuation  of  the 


100 


State  Insurance  Fund 


National  Convention  of  Insurance  Commissioners  issued  an  an¬ 
nual  pamphlet  giving  valuations  of  securities  as  of  December  31 
of  each  year.  It  is  my  understanding  that  the  Insurance  Depart¬ 
ment  of  this  State  will  publish  the  statements  of  the  various  com¬ 
panies  to  it,  basing  the  value  of  securities  upon  the  valuations  in 
this  table;  and  in  the  case  of  the  State  Fund,  due  to  a  curious 
resolution  of  the  National  Convention  of  Insurance  Commissioners 
prescribing  par  as  the  value  of  all  Liberty  bonds,  regardless  of  the 
price  at  which  they  were  purchased  (the  State  Fund  bought 
during  the  last  half  of  1918  a  considerable  amount  of  bojids  well 
below  par),  the  Department  valuation  will  probably  exceed  the 
book  value  of  the  State  Fund,  which  in  all  cases  is  purchase  price. 
On  June  30,  1918,  however,  the  Insurance  Department  required 
the  quarterly  statement  to  he  filed  valuing  the  securities  at  actual 
market  basis  notwithstanding  that  an  average  value  substantially 
above  the  market  was  used  December  31,  1917,  and  that  the  De¬ 
cember  31,  1918,  value  is  substantially  above  the  market.  It 
would  be  a  serious  misfortune  for  the  State  Fund,  after  having 
paid  dividends  or  otherwise  disposed  of  its  apparently  free  sur¬ 
plus  on  the  basis  of  the  Department  valuation,  to  suddenly  he 
compelled  to  mark  down  its  securities  to  a  low  market  value.  In 
order  to  he  safe,  therefore,  it  would  appear  wise  for  the  State 
Fund  not  to  carry  its  securities  above  actual  market  values,  and 
the  reserve  for  investment  depreciation  was  determined  by  taking 
the  actual  market  value;  hut  certain  securities  having  shown  a 
tendency  to  further  recede,  values  slightly  lower  than  the  market 
were  taken  and  fractional  values  were  dropped. 

VII.  Reserve  for  Experience  Fluctuation. —  The  period  ending 
December  31,  1918,  was  an  unusually  profitable  one  for  the  State 
Fund,  due  to  the  collection  of  large  amounts  of  additional  pre¬ 
miums  and  audits  for  that  and  preceding  periods.  With  the 
readjustments  of  industry  to  a  peace  basis,  it  must  be  evident 
that  the  State  Fund  will  not  have  this  source  of  income  much,  if 
any,  longer.  On  the  other  hand,  hills  are  now  pending  in  the 
Legislature  whose  purpose  is  to  increase  the  benefits  under  the 
act,  and  it  would  he  inexpedient  for  the  State  Fund  to  immedi¬ 
ately  increase  its  rates.  Indeed,  in  appearing  before  the  Com¬ 
mission  when  the  bills  were  under  consideration,  as  you  will 


Answer  to  Report  of  Jeremiah  F.  Connor 


101 


recall,  we  stated  that  the  policy  of  the  State  Fund  would  be  to 
carefully  study  the  matter  and  make  no  increase  in  rates  which 
did  not  seem  to  be  required.  If  these  increased  benefits  and  the 
industrial  conditions  we  must  face  during  the  readjustment  period 
are  such  that  in  actual  effect  the  present  rates  are  not  sufficient, 
then,  the  State  Fund  would  be  faced  with  the  alternative  of 
decreasing  or  omitting  its  dividend  or  decreasing  its  surplus. 
From  the  business  point  of  view,  therefore,  all  these  actions  would 
be  very  detrimental  to  the  best  interests  of  the  State  Fund.  It, 
therefore,  seemed  a  much  wiser  course,  and  one  looking  more  to 
the  safety  and  stability  of  the  State  Fund  as  a  permanent  going 
concern,  to  set  aside  a  reserve  for  this  item  which  might  be  drawn 
upon  to  meet  these  conditions  without  the  necessity  of  reducing 
or  discontinuing  the  State  Fund’s  dividend.  The  American  busi¬ 
ness  man,  in  making  contracts  for  the  future  for  insurance  or  any 
other  service  or  commodity,  naturally  makes  his  contract  with  a 
view  to  what  service  he  will  get  and  what  it  will  cost  in  the  future, 
and  without  much  consideration  for  the  past.  Therefore,  no 
matter  how  much  the  State  Fund’s  past  dividends  may  have  been, 
if  the  indications  were  that  those  dividends  could  not  be  main¬ 
tained  or  must  be  omitted  entirely,  the  business  man  promised  a 
dividend  from  a  competing  mutual  company  would  not  feel  neces¬ 
sarily  bound  in  gratitude  to  remain  with  the  State  Fund.  Indeed, 
his  own  business  success  in  the  competitive  world  depends  on  his 
keeping  his  eye  on  the  future  rather  than  the  past.  Therefore,  it 
seems  that  the  permanence  of  the  State  Fund  depends  more  upon 
its  establishing  a  satisfactory  dividend  that  it  can  maintain 
rather  than  attempting  to  distribute  too  closely  the  actual  earn¬ 
ings  of  a  definite  period,  and  this  reserve  has  been  set  up  in  accord¬ 
ance  with  this  policy. 

It  might  have  been  possible  to  omit  this  reserve  and  allow  the 
amount  to  remain  in  the  surplus,  but  the  American  public  has 
been  educated  to  the  general  theory  that  the  surplus  of  insurance 
institutions  ought  not  to  decrease,  at  least  until  it  has  reached 
a  very  substantial  proportion,  and  that  a  decrease  in  surplus  is  a 
sign  of  weakness.  Thus,  this  amount  carried  in  general  sur¬ 
plus  would  not  be  so  freely  available  for  the  purposes  for  which 
it  was  designed  as  it  is  when  set  up  as  a  separate  reserve.  In 


102 


State  Insurance  Fund 


any  event,  the  effect  on  policyholders’  dividends  would  be  no 
different  whether  this  is  carried  as  a  separate  reserve  or  simply 
used  to  increase  the  surplus  shown  in  the  statement,  if  that  sur¬ 
plus  is  not  distributed.  In  this  connection,  might  I  point  out 
that  the  Ohio  State  Fund  generally  considered  very  radical  in  its 
management,  having  a  monopoly  of  the  business  in  Ohio  so  that 
it  is  not  necessary  to  give  the  careful  attention  to  competitive  con¬ 
ditions  that  we  must  give,  yet  deemed  it  expedient,  with  a  surplus 
over  and  above  catastrophe  reserve  of  over  one  million  dollars,  to 
distribute  but  little  more  than  $300,000'  in  the  way  of  dividends  ? 

VIII.  Reserve  for  Dividends  to  be  Paid. —  Technically,  this  is 
not  a  liability,  as  the  dividends  had  not  been  voted  prior  to  De¬ 
cember  31 ;  but  the  setting  up  of  this  item  is  in  accordance  with 
the  general  practice  of  insurance  companies  and  the  requirement 
of  the  Superintendent  of  Insurance  where  the  dividends  had  actu¬ 
ally  been  voted. 

IX.  Statutory  C  atastrophe  Surplus. —  This  is  the  surplus  re¬ 
quired  by  the  statute  to  be  accumulated  until,  in  the  discretion  of 
the  Commission,  it  is  sufficient.  I  do  not  believe  that  the  State 
Fund  can  successfully  operate  competitively,  without  reinsurance 
(the  stock  companies  have  their  own  mutual  reinsurance  pool  and 
the  mutual  companies  either  have  such  a  pool  or  take  reinsurance 
from  London  Lloyds)  on  a  catastrophe  surplus  any  less  than  this 
amount,  and  I  believe  that  this  surplus  should  be  built  up  prob¬ 
ably  until  it  reaches  approximately  one  million  dollars.  After 
this  time  is  reached,  I  do  not  believe  there  will  be  any  necessity 
for  further  charges  against  policyholders  for  this  purpose,  although 
I  think  probably  a  small  free  surplus  such  as  shown  in  the  state¬ 
ment  should  be  maintained  to  cover  various  contingencies,  such 
as  further  depreciation  of  investment  securities,  a  sudden  change 
in  conditions  such  as  was  experienced  in  1915,  when  war  contracts 
of  European  countries  gave  such  a  stimulus  to  industry  that  acci¬ 
dent  costs  increased  very  substantially  before  it  was  possible  to 
revise  rates  to  take  care  of  them. 

X.  Unassigned  Surplus. —  This  amount  is  less  than  10  per  cent, 
of  the  State  Fund’s  premium  income  and  would  all  be  gone  within 
a  ye  ay  should  industrial  conditions,  rating  plans,  or  other  unfore¬ 
seen  contingency  make  rates  inadequate.  In  this  connection  I 


Answer  to  Report  of  Jeremiah  F.  Connor 


103 


might  point  out  that  the  experience  rating  plan,  which  was 
expected  to  adjust  rates  to  the  individual  risks  without  substantial 
change  in  the  companies’  premium  income,  has  shown  a  tendency 
to  produce  substantial  reductions.  I  do  not  believe  it  is  the  part 
of  ^wisdom  for  the  State  Fund  to  operate  upon  a  general  contin¬ 
gency  surplus  much  smaller  than  that  held  on  December  31,  1918. 
Of  course,  circumstances  in  the  past  have  left  no  choice  in  the 
matter,  but  I  sincerely  trust  we  will  not  be  so  unfortunately  placed 
again.  In  this  respect,  might  I  again  call  attention  to  the  very 
conservative  attitude  of  the  Ohio  authorities  in  the  matter  ? 

(Signed)  A.  H.  Mowbray, 

Actuary. 

February  28,  1919. 

II.  Comparison  of  Ohio  and  New  York  Rates. 

March  4,  1919. 

Jeremiah  F.  Connor,  Esq.,  80  Maiden  Lane ,  New  York  City. 

Dear  Sir. —  I  have  received  your  communication  of  February 
26  relating  to  the  comparison  made  by  the  actuary  of  the  Ohio 
State  Fund  between  Ohio  and  Yew  York  workmen’s  compensation 
insurance  rates. 

In  commenting  upon  this  comparison,  I  have  no  desire  to  place 
myself  in  the  role  of  a  critic  of  the  Ohio  State  Fund.  Unfortu¬ 
nately,  however,  the  comparison  would  appear  to  warrant  the 
inference  that  the  rates  of  the  Yew  York  State  Fund,  which  are 
approximately  15  j>er  cent,  lower  than  the  Yew  York  manual  rates 
of  the  casualty  companies,  are  unduly  high  in  comparison  with 
the  rates  of  the  Ohio  State  Fund.  This  inference  is  not  war¬ 
ranted  by  the  facts,  and,  in  justice  to  the  Yew  York  State  Fund, 
I  wish  to  point  out  certain  errors  or  oversights  in  the  comparison 
of  rates  as  presented  by  the  actuary  of  the  Ohio  State  Fund. 

The  actuary  of  the  Ohio  State  Fund  recognizes  certain  differ¬ 
ences  in  the  operating  conditions  in  the  Ohio  State  Fund  and  in 
the  stock  companies  doing  business  in  Yew  York  State  and  ac¬ 
cordingly  proposes  that  the  Ohio  rates  be  increased  by  20  per 
cent,  in  order  to  equalize  the  conditions  of  comparison.  However 
the  case  may  lie  as  respects  the  stock  companies,  this  20  per  cent. 


104 


State  Insurance  Fund 


multiplication  of  the  Ohio  rates  cannot  be  accepted  as  constituting 
a  fair  basis  of  comparison  as  between  the  rates  of  the  Ohio  and 
Yew  York  State  Funds.  The  proper  method  of  comparison  here 
is  to  modify  the  rates  of  both  the  Ohio  and  the  Yew  York  State 
Funds,  respectively,  in  allowance  for  various  factors  of  difference, 
and  then  to  compare  the  resulting  modified  rates.  I  shall  there¬ 
fore  proceed  to  point  out  the  factors  of  difference  for  which 
allowance  should  thus  he  made  in  the  two  cases. 

Modifications  of  Ohio  State  Fund  Rates: 

1.  The  treatment  of  the  office  payroll  in  the  two  Funds  is  differ¬ 
ent  and  operates  to  give  the  Ohio  Fund  a  higher  rate  on  its  several 
classifications  than  the  manual  rate  as  adjusted  by  it  for  merit 
rating.  In  the  Yew  York  Fund  the  office  payroll  is  separately 
classified  and  rated.  In  the  Ohio  Fund  the  office  payroll  up  to 
10  per  cent,  of  the  operating  payroll  is  included  at  the  operating 
rate.  Except  in  very  low-rated  classifications,  the  office  classifi¬ 
cation  is  only  from  5  to  10  per  cent,  of  the  operating  classification 
rate,  and,  therefore,  the  Ohio  Fund  gets  substantially  the  oper¬ 
ating  classification  rate  upon  a  larger  payroll  running  up  to  10 
per  cent,  greater.  Mr.  Watson  estimates  that  this  difference  is 
equivalent  to  an  increase  of  9  per  cent,  in  the  Ohio  rate,  and  I 
accept  his  estimate. 

2.  The  rates  quoted  in  Mr.  Watson’s  communication  are  mini¬ 
mum  rates  and  are  not  subject  to  any  discount  for  merit  rating, 
but  are  subject  to  charges  for  adverse  experience.  According  to 
the  Ohio  manual  provisions  (Rules  IV,  V,  VI,  VII,  VIII,  pages  4 
and  5,  and  Appendix  B,  pages  178-187),  the  employer  does  not 
enjoy  the  manual  rate  if  his  loss  ratio  has  exceeded  60  per  cent., 
but  in  such  cases  he  pays  a  surcharge  equal  to  30  per  cent,  of  the 
excess  loss  over  60  per  cent,  of  his  premiums  up  to  a  maximum 
charge  of  24  per  cent,  above  the  manual  rate.  Under  Rule  II, 
page  3,  it  appears  that  a  new  risk  pays  an  initial  premium  equal 
to  124  per  cent,  of  the  manual  rate.  How  much  the  average 
increase  will  be  it  is  difficult  to  tell. 

In  Mr.  Watson’s  communication  the  total  premiums  of  the  Ohio 
Fund  up  to  May  15,  1918,  amounted  to  $25,269,532.85.  Of  these 
there  were  unearned  on  that  date  $1,540,662,  leaving  a  balance 
earned  of  $23,728,870.85. 


Answer  to  Report  of  Jeremiah  F.  Connor 


105 


In  the  same  statement  there  was  recorded  as  disbursed  for 
“  warrants  cashed,”  which  I  understand  to  be  for  loss  payments, 
$13,791,522.77,  and  there  is  under  liabilities  a  “  reserve  set  aside 
to  bring  all  claims  to  full  maturity  ”  of  $8,449,478.40 ;  this  would 
giye  total  incurred  losses,  $22,241,001.17.  This  would  give  a 
loss  ratio  of  93.7  per  cent,  or  an  average  excess  over  60  per  cent, 
loss  ratio  of  33.7  per  cent.  30  per  cent,  of  this  is  10.1  per  cent. 
But,  of  course,  in  this  average  loss  ratio  there  must  be  many  risks 
whose  individual  loss  ratio  was  well  below  60'  per  cent.,  and  there 
will  undoubtedly  be  some  whose  individual  loss  ratio  exceeded  140 
per  cent.,  so  that  the  24  per  cent,  limit  of  extra  charge  became 
effective.  The  indication  would  seem  to  be  that  the  Ohio  State 
Fund  would  probably  receive,  as  additional  premiums  under  its 
merit  rating  provision,  more  than  one-half  of  the  maximum,  but 
in  the  absence  of  precise  knowledge  and  in  order  to  take  a  very 
conservative  view  of  the  matter,  I  shall  assume  that  this  gave  an 
average  increase  of  11  per  cent.,  which  with  the  9  per  cent,  addi¬ 
tional  through  the  treatment  of  office  payroll  would  indicate  that 
the  collectible  rates  of  the  Ohio  Fund  are  on  the  average  20  per 
cent,  above  their  manual  rates. 

Modifications  of  Neiv  York  State  Fund  Rates: 

1.  In  the  case  of  the  Yew  York  State  Fund,  the  manual  rates 
are  subject  to  reduction  by  schedule  rating  and  experience  rating. 
In  his  annual  report  for  the  year  ending  December  31,  1918,  Mr. 
Senior  showed  that  the  average  reduction  from  schedule  rating 
was  6.3  per  cent.  I  have  recently  had  a  list  prepared  of  experi¬ 
ence  rated  risks  of  the  Yew  York  State  Fund  and  this  showed  an 
average  reduction  on  these  risks  of  6.6  per  cent.  Taking  these 
together,  the  Yew  York  State  Fund  collectible  rates,  therefore, 
at  the  present  time  may  be  considered  to  be  12.9  per  cent,  below 
the  Yew  York  State  Fund  manual  rates.  A  comparison  of  these 
rates  makes  a  showing  much  more  favorable  to  the  Yew  York 
State  Fund  than  is  the  implication  of  the  comparison  in  Mr.  Wat¬ 
sons  communication;  yet  such  a  comparison  would  be  distinctly 
unfair  to  the  Yew  York  State  Fund,  because  this  takes  no  account 
of  two  other  conditions  wherein,  through  no  fault  of  the  Yew  York 
State  Fund,  the  Ohio  State  Fund  has  a  distinct  advantage. 


106 


State  Insurance  Fund 


2.  The  expenses  of  the  Ohio  State  Fund  are  paid  by  the  State. 
The  expenses  of  the  Yew  York  State  Fund  are  paid  out  of  its 
premiums  and  it  is  further  subjected,  through  no  fault  of  its  own, 
to  the  sharp  competition  of  stock  and  mutual  companies,  so  that 
it  has  at  considerable  expense  to  itself  to  secure  its  business  in 
competition  with  those  companies  and  hold  its  business  in  the  face 
of  such  competition.  The  incurred  expenses  of  the  Yew  York 
State  Fund  for  the  year  1918  were  $246,639.75.  The  incurred 
expenses  of  the  Ohio  State  Fund  for  the  year  ending  May  15, 
1918,  are  given  as  $327,806.04.  But  in  the  case  of  the  Yew 
York  State  Fund  this  expense  includes  over  $30,000  as  its  share 
of  the  expenses  of  the  State  Industrial  Commission.  If  the  Yew 
York  State  Fund  were  relieved  of  the  burden  of  competitive 
expense  imposed  upon  it  and  any  contribution  toward  the  expenses 
of  the  State  Industrial  Commission,  and  further  had  the  entire 
volume  of  the  business  of  the  State  over  which  to  spread  its 
expenses,  as  has  the  Ohio  Fund,  even  though  the  staff  of  the  Yew 
York  Fund  would  have  to  be  somewhat  increased  to  care  for  the 
larger  volume  of  business,  I  am  satisfied  that  the  Yew  York  State 
Fund’s  expense  ratio  would  not  exceed  the  very  low  figure  of 
3%  per  cent,  shown  by  the  Ohio  State  Fund.  Under  such  circum¬ 
stances,  it  would  seem  that  the  fair  basis  of  comparison  would  be 
to  deduct  from  the  collectible  rates  of  the  Yew  York  State  Fund 
its  expense  ratio  as  shown  on  its  1918  business  (7%  per  cent.) 
rather  than  to  add  to  the  Ohio  State  Fund’s  rates  its  realized 
expense  of  3Y2  per  cent.  A  comparison  on  this  basis  assumes  that 
the  expenses  of  the  State  Fund  in  each  case  are  paid  by  the  State. 

3.  The  Ohio  State  Fund  has  the  benefit  of  revenue  from  a  source 
not  available  to  the  Yew  York  State  Fund,  as  the  rules  of  the  Ohio 
State  Industrial  Commission  require  self-insurers  to  pay  into  the 
Ohio  State  Fund  a  premium  equal  to  5  per  cent,  of  what  their 
premium  for  a  full  coverage  in  the  Ohio  State  Fund  would  be. 
This  premium,  as  I  understand  it,  goes  to  the  catastrophe  surplus 
of  the  Ohio  Fund.  The  statutory  provision  as  respects  catas¬ 
trophe  surplus  in  the  Ohio  State  Fund  is  the  same  as  the  statu¬ 
tory  provision  in  this  State,  but,  due  to  its  larger  volume  of  busi¬ 
ness  and  its  non-competitive  situation,  the  Ohio  Fund  has  been 


Answer  to  Report  of  Jeremiah  F.  Connor 


107 


able  to  accumulate  more  quickly  than  the  New  York  State  Fund 
the  statutory  surplus  deemed  sufficient  by  its  Commission,  so  that 
further  accretions  to  it  are  not  necessary.  In  the  statement  as  of 
May  15,  1916,  this  is  given  as  $624,850.62,  and  in  the  statement 
of  May  15,  1918,  as  $887,282.82.  Without  definite  knowledge 
on  the  subject,  it  seems  highly  probable  that  this  entire  increase 
came  from  the  revenue  from  self-insurers.  The  New  York  State 
Fund  is  not  yet  in  that  fortunate  position  where  it  is  deemed  expe¬ 
dient  to  discontinue  the  further  accumulation  of  catastrophe  sur¬ 
plus.  Indeed,  with  the  greater  congestion  of  business  in  certain 
parts  of  New  York  State  as  compared  with  Ohio,  there  is  reason 
to  believe  that  the  New  York  State  Fund  will  require  a  somewhat 
larger  catastrophe  surplus  than  the  Ohio  Fund.  The  New  York 
Fund  rates,  therefore,  provide  a  margin  of  5  per  cent,  for  catas¬ 
trophe  surplus,  and,  in  order  to  make  them  directly  comparable 
with  the  collected  rates  of  the  Ohio  Fund,  this  5  per  cent,  should 
also  be  deducted.  This  makes  a  further  reduction  in  New  York 
State  Fund  rates  below  its  manual  rates  of  12%  per  cent.,  or  a 
total  reduction  for  the  three  factors  of  difference  amounting  to 
25.4  per  cent. 

I  have  not  attempted-  the  comparison  on  this  basis  for  all  of  the 
rates  quoted  in  Mr.  Watson’s  communication.  I  have,  however, 
selected  twelve  representative  classifications  common  to  both 
States,  and  made  such  a  comparison,  and  upon  this  basis  the  rates 
of  the  New  York  State  Fund  are  found  to  be  about  7%  per  cent, 
less  than  the  corresponding  rates  of  the  Ohio  State  Fund.  If  it 
is  desired,  the  range  of  classifications  included  in  the  comparison 
can  be  readily  extended. 

I  am  appending  to  this  memorandum  two  tables,  the  first  show¬ 
ing  the  manual  rates  of  the  two  Funds,  and  the  actual  collectible 
rates,  and  the  second  showing  the  collectible  rates  after  adjust¬ 
ment  of  the  New  York  State  Fund  rates  as  above  outlined,  in 
order  to  make  them  properly  comparable. 

Of  course,  these  comparisons  are  of  advance  rates  only  and  not 
of  net  costs  to  policyholders.  For  the  policy  period  just  closed 
the  New  York  State  Fund  has  declared  a  dividend  of  10  per  cent., 
and  we  have  every  expectation  of  maintaining  that  dividend.  The 


State  Insurance  Fund 


108 

Ohiot  State  Fund,  according  to  Mr.  Watson’s  communication,  was 
to  declare  as  of  May  15,  1918,  dividends  aggregating  $336,452.46. 
It  is  not  clear  whether  this  is  for  a  year  or  a  six-months’  period. 
If  for  a  year,  the  rates  would  be  about  3%  per  cent.,  and  if  for 
a  six-months’  period,  about  7  per  cent.  Upon  this  basis  of  com¬ 
parison,  it  would  appear  that,  under  the  same  operating  condi¬ 
tions,  the  net  cost  to  policyholders  of  the  Yew  York  State  Fund 
would  have  been  slightly  less  than  the  net  cost  to  policyholders 
of  the  Ohio  State  Fund. 

Very  truly  yours, 

F.  Spencer  Baldwin, 
Manager ,  State  Insurance  Fund. 


TABLE  I. 

Manual  and  Collectible  Rates  of  the  Yew  York  and  Ohio 
State  Funds  Without  Adjustment  for  any  Difference 
in  Operating  Conditions  to  Bring  Them  to  a  Comparable 
Basis. 

( For  which  see  Table  IT.) 


Ohio 

manual 

rate 

Minimum 
estimate 
of  Ohio 
collectible 
rate 

New  York 
State 
fund 
manual 
rate 

New  York] 
State 
fund 
average 
collectible 
rate 

Machine  shop  —  no  foundry . 

1.25 

1.50 

1.89 

1 .65 

Machine  shop  —  with  foundry . 

1.45 

1.74 

2.18 

1.90 

Foundry,  iron . 

1 .55 

1.86 

2.18 

1.90 

Malleable  iron  works . 

1.65 

1.98 

*2.18 

1.90 

Blast  furnaces . 

3.25 

3.90 

*5.00 

4.36 

Sheet  metal  works . 

1.85 

2.22 

2.07 

1.80 

Planning  and  moulding  mills . 

1.90 

2.28 

3.43 

2.99 

Cotton  spinning  and  weaving . 

|  .65 

ye 

/  1.15 

1.00 

Woolen  spinning  and  weaving . 

.  4  O 

\  1.01 

.88 

Boot  and  shoe  manufacturing . 

.24 

.29 

.57 

.50 

Bakeries . 

1.15 

1.38 

1.45 

1.26 

Breweries . 

1.95 

2.34 

2.99 

2.60 

*  Exception  to  usual  rule  that  State  Fund  rates  are  14.3%  below  the  stock  com¬ 
pany  manual  rates. 


Answer,  to  Report  of  Jeremiah  F.  Connor, 


109 


TABLE  II 

Comparison  of  Rates  of  the  New  York  and  Ohio  State 
Funds  —  New  York  Rates  Adjusted  to  Allow  for  Dif¬ 
ference  in  Operating  Conditions  as  Compared  with  the 
Ohio  State  Fund. 


New  York 


Machine  shop  —  no  foundry . 

Machine  shop  —  with  foundry . 

Foundry,  iron . 

Malleable  iron  works . 

Blast  furnaces . 

Sheet  metal  works . 

Planning  and  moulding  mills . 

Cotton  spinning  and  weaving . 

Woolen  spinning  and  weaving . 

Boot  and  shoe  manufacturing . 

Bakeries . 

Breweries . 

Average  of  12  representative  classifications 


Minimum 
estimate 
of  Ohio 
collectible 
rates 

State  fund 
collectible 
rate,  less 
loading  for 
expenses  and 
catastrophe 
surplus 

1.50 

1.41 

1.74 

1.63 

1.86 

1.63 

1.98 

1.63 

3.90 

3.73 

2.22 

1.54 

2.28 

2.56 

.78 

.86 

.78 

.75 

.29 

.43 

1.38 

1.08 

2.34 

2.23 

1.754 

1  623 

no 


State  Insurance  Fund 


APPENDIX  ITT 


MEMORANDUM  ON  SPECIAL  GROUPS 

March  4,  1919. 

The  fundamental  condition  for  the  creation  of  a  special  group, 
regarded  solely  from  the  point  of  view  of  sound  insurance  manage¬ 
ment,  is  a  sufficient  payroll  exposure  to  afford  a  satisfactory 
insurance  distribution  or  a  proper  insurance  average.  In  deter¬ 
mining  what  amount  of  payroll  exposure  should  be  taken  as  afford¬ 
ing  such  a  distribution  and  average,  the  State  Fund,  in  the  begin¬ 
ning,  laid  down  the  requirement  of  a  payroll  of  approximately 
2,500  employees,  and  an  annual  expenditure  of  at  least  $1,000,000. 
Later,  an  additional  requirement  of  a  premium  of  at  least  $7,500 
for  six  months  was  adopted  in  order  to  insure  an  adequate  group 
premium  on  the  basis  of  low-rated  classifications,  as  the  experi¬ 
ence  showed  that  the  rate  of  premiums  was  more  important  than 
the  size  of  the  payroll  in  determining  the  proper  basis  for  special 
grouping.  In  short,  an  individual  employer  or  a  number  of 
employers  in  the  same  trade  having  2,500  employees  and  an 
annual  payroll  of  $1,000,000,  yielding  a  premium  of  $7,500  for 
six  months  may  be  regarded  as  an  insurance  unit  for  the  pur¬ 
poses  of  the  State  Fund  and  may,  therefore,  be  properly  set  up 
as  a  group  within  the  meaning  of  the  law.  It  would  obviously  not 
be  proper  to  recognize  as  a  group  any  individual  employer  or  any 
number  of  employers  whose  total  exposure,  having  regard  to  the 
number  of  employees  and  the  size  of  the  payroll  and  the  amount 
of  the  premium,  was  too  small  to  afford  a  satisfactory  insurance 
distribution.  On  the  other  hand,  it  is  entirely  proper  to  set  up 
as  a  group  within  the  meaning  of  the  law  an  individual  employer 
or  number  of  employers,  having  an  exposure  with  respect  to  the 
number  of  employees,  and  payroll  and  premium  sufficiently  large 
to  constitute  a  real  insurance  unit.  The  limits  for  the  establish¬ 
ment  of  special  groups  have  been  fixed,  with  due  regard  to  this 
fundamental  consideration,  with  a  view  to  securing  a  reasonable 
uniformity  of  experience  in  such  groups  over  successive  policy 
periods  and  minimizing  the  possibility  of  a  deficit  in  any  period. 


Answer  to  Report  of  Jeremiah  F.  Connor 


111 


The  objection  has  been  brought  against  the  special  group  plan 
that  it  involves  discrimination  in  favor  of  employers  so  grouped, 
as  it  enables  .them  to  get  a  low  rate  of  insurance  in  contrast  to 
employers  in  general  groups  who  are  compelled  to  share  the  bur¬ 
den  of  other  employers  in  such  groups.  It  is  contended  that  the 
plan  is  not  consistent  with  the  theory  of  workmen’s  compensation, 
which  requires  that  the  cost  of  industrial  accidents  be  distributed 
over  the  entire  field  of  industry  and  borne  collectively  by  the 
employers,  as  a  whole.  It  is  held  that  employers  who  are  placed 
in  special  groups  are  relieved  of  their  proper  share  of  this  col¬ 
lective  burden  and  are  enabled  to  obtain  insurance  at  special  low 
rates. 

In  answer  to  this  argument,  it  may  be  pointed  out  that  dis¬ 
crimination  is  written  into  the  Workmen’s  Compensation  Law 
itself.  By  permitting  self-insurance,  the  law  discriminates  in  favor 
of  the  large  employer  by  giving  him  the  opportunity  to  carry  his 
own  risk  —  an  opportunity  not  open  to  the  small  employer.  By 
permitting  mutual  insurance,  the  law  again  recognizes  discrimina¬ 
tion,  as  it  enables  groups  of  employers  insured  in  mutual  associa¬ 
tions  to  obtain  insurance  at  the  net  collective  cost  of  carrying  their 
particular  trade  risk,  and  thus  to  escape  their  contribution  toward 
the  cost  of  insuring  the  more  hazardous  plants  excluded  from  the 
mutual  associations.  As  long  as  the  options  of  mutual  insurance 
and  self-insurance  are  left  open  to  employers  under  the  law,  it  is 
not  consistent  to  condemn  the  special  group  plan  of  the  State  Fund 
as  discriminatory.  Furthermore,  the  group  plan,  as  embodied  in 
the  original  provisions  of  the  law,  involved  discrimination  as 
between  employers  placed  in  different  groups.  The  composition 
of  these  groups  was  more  or  less  haphazard.  Two  of  the  original 
groups  contain  only  a  single  employment  each  —  tanneries  and 
pulp  and  paper  mills.  The  dividend  percentages  are  not  always 
the  same  for  all  groups.  The  employer  who  receives  a  dividend 
of  20  per  cent,  in  one  group,  as  combined  before  the  original  forty- 
two  groups  were  combined  into  six,  might  be  held  to  enjoy  the 
benefit  of  a  special  discriminative  rate,  as  contrasted  with  the 
employer  who  gets  a  dividend  of  only  5  per  cent.  The  law  goes 
even  further  than  this  in  permitting  discrimination,  as  it  legalizes 
discrimination  between  individual  risks  through  the  provision  of 


112 


State  Insurance  Fund 


section  95,  authorizing  the  Commission  to  adopt  a  system  of 
schedule  rating  in  such  manner  as  to  take  account  of  the  peculiar 
hazard  of  each  individual  risk.  In  short,  the  objection  to  dis¬ 
crimination  that  has  been  urged  against  the  special  group  plan 
applies  also  to  self-insurance,  mutual  insurance,  to  the  group  sys¬ 
tem  itself,  and  to  schedule  rating  as  authorized  by  law. 

The  objection  under  consideration  is  not  well  taken  in  any 
event,  for  it  is  desirable  and  proper  to  discriminate  between  em¬ 
ployers  and  between  groups  in  the  matter  of  dividends,  since  this 
recognizes  differences  in  hazard,  especially  as  influenced  by  safety 
equipment  and  organization  of  plants  and  puts  a  premium  on  the 
improvement  of  risks  and  the  prevention  of  accidents.  The  em¬ 
ployer  of  a  group  that  is  offered  the  prospect  of  an  increased 
dividend,  to  be  obtained  only  by  the  reduction  of  insurance  costs, 
is  stimulated  by  such  incentive  to  exercise  proper  care  in  the 
matter  of  safety  organization  and  accident  prevention,  to  improve 
the  safety  standards  of  plants  and  to  reduce  the  preventable  toll 
of  industrial  accidents.  A  discrimination  that  is  based  on  differ¬ 
ences  in  trade  hazards  and  individual  risks  is  entirely  justifiable. 
In  this  connection,  the  Attorney-General  of  the  State,  in  an 
opinion  on  the  question  of  individual  groups,  January  25,  1916; 
pointed  out  that  “  the  commission  is  permitted  to  discriminate  ” 
in  the  making  of  rates,  but  the  nature  of  so  doing  is  not  arbitrary 
“  but  is  presumed  to  take  into  account  some  hazard  or  protection 
against  some  hazard.” 


Answer  to  Report  of  Jeremiah  F.  Connor 


118 


APPENDIX  IV 


MEMORANDUM  ON  STATE  FUND  EXPERIENCE 
RATING  PLAN 

The  advance  premium  is  computed  in  the  usual  manner  accord¬ 
ing  to  the  State  Fund  schedule  rates.  The  plan  then  provides  for 
the  readjustment  of  rates  at  the  close  of  each  policy  period  on  the 
basis  of  the  following  charges :  the  incurred  losses,  including  cash 
payments  and  loss  reserves  ;  the  catastrophe  contribution  of  5  per 
cent  of  the  premium ;  the  charge  for  management  expenses,  accord¬ 
ing  to  the  actual  expense  ratio  of  the  State  Fund  for  the  policy 
period  in  question;  the  amount  of  the  dividend  in  the  general 
group  in  which  the  experience-rated  risk  is  placed,  if  any  such 
dividend  has  been  declared;  and  an  additional  reserve  for  excess 
risk,  graduated  according  to  the  size  of  the  premium,  from  25 
per  cent  for  a  semi-annual  premium  from  $1,000  to  $2,000,  down 
to  5  per  cent  for  a  semi-annual  premium  of  over  $7,500.  The 
rules  of  the  plan  further  provide  that  if  the  total  amount  of  the 
charges  in  any  policy  period  amount  to  more  than  the  earned  pre¬ 
mium,  the  State  Fund  may  charge  the  amount  of  such  deficit 
against  any  surplus  earned  in  succeeding  policy  periods,  or  in  the 
event  of  the  withdrawal  of  the  policyholder,  require  the  payment 
of  such  amount  in  cash;  provided,  however,  that  the  amount  so 
chargeable  against  the  policyholder  for  any  policy  period  shall  be 
limited  to  50  per  cent  of  the  earned  premium  for  that  period. 

The  amount  of  the  dividend,  if  any,  is  included  in  the  charges 
on  which  the  rate  readjustment  is  made,  for  the  reason  that  each 
risk  subject  to  this  experience-rating  plan  is  a  member  of  one  of 
the  general  groups,  and  would,  therefore,  receive  credit  for  any 
dividend  declared  in  such  group.  Account  should,  of  course,  be 
taken  of  such  group  dividend  in  the  rate  readjustment  under  the 
experience-rating  plan,  and  accordingly,  the  dividend  credit,  if 
any,  is  offset  by  a  charge  of  the  same  amount  in  computing  the 
experience  rate. 

The  reserve  for  excess  risk  is  intended  to  provide  for  losses 
through  death  and  serious  disability  cases  which  "distribute  them- 


114- 


State  Insurance  Fund 


selves  unevenly  over  policy  periods.  As  risks  subject  to  this  plan 
are  not  large  enough  to  yield  a  proper  insurance  distribution  and 
average  for  a  single  policy  period,  it  is  necessary  to  establish  a 
reserve  that  will  take  care  of  excess  losses  in  any  one  period.  The 
percentages  of  such  reserves  are  determined  by  careful  actuarial 
computations  and  estimates.  Further  protection  against  unusual 
losses  above  the  amount  of  the  excess  risk  reserve  is  afforded  by 
the  provision  for  charging  against  the  policy  account  the  amount 
of  any  deficit  in  a  policy  period  up  to  50  per  cent  of  the  earned 
premium  for  that  period.  The  State  Fund  is  amply  protected  by 
these  provisions  for  excess  risk  and  additional  premium  charge. 

It  will  be  seen  that  this  experience-rating  plan  is  based  on  two 
principles.  First,  it  is  applicable  only  to  large-size  risks.  Experi¬ 
ence  rating  is  not  properly  applicable  to  small  risks  for  the 
experience  of  such  risks  is  sure  to  fluctuate  widely,  and  no  experi¬ 
ence-rating  plan  could  be  devised  that  would  work  satisfactorily 
either  for  the  insurance  carrier  or  insured.  Only  large-size  risks, 
moreover,  can  assume  the  expense  of  installing  a  safety  equipment 
and  organization  necessary  to  insure  a  favorable  experience. 
Second,  the  experience  rating  is  based  on  the  current  experience 
of  each  policy  period  and  not  on  prior  experiences.  It  is  obvious 
that  current  experience  alone  correctly  reflects  the  existing 
physical  and  moral  hazard  of  a  plant,  as  prior  experience  may  be 
the  reflex  of  past  conditions  that  have  been  changed  completely. 


Gaylord  Bros. 

Makers 

Syracuse.  N .  Y. 
PAT.  JAN.  21. 1901 


